UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2017

OR

For the transition period from                     to                     .

Commission File Number: 000-50478

NEXSTAR MEDIA GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

(972) 373-8800

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒

As of November 6, 2017, the registrant had 45,566,127 shares of Class A Common Stock outstanding.

 

 

 

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TABLE OF CONTENTS

 

 

 

 

 

 

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PART I. FINANCIAL INFORMATION

NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information, unaudited)

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

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NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share information, unaudited)

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

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NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2017

(in thousands, except share information, unaudited)

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

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NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

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NEXSTAR MEDIA GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Organization and Business Operations

As of September 30, 2017, Nexstar Media Group, Inc. and its wholly-owned subsidiaries (“Nexstar”) owned, operated, programmed or provided sales and other services to 170 full power television stations, including those owned by variable interest entities (“VIEs”), in 100 markets in the states of Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia and Wisconsin. The stations are affiliates of ABC, NBC, FOX, CBS, The CW, MyNetworkTV, and other broadcast television networks. Through various local service agreements, Nexstar provided sales, programming, and other services to 36 full power television stations owned and/or operated by independent third parties.

On January 17, 2017, Nexstar completed its merger (the “Merger”) with Media General, Inc., a Virginia corporation (“Media General”), whereby Nexstar acquired the latter’s outstanding equity in exchange for cash and stock, plus additional consideration in the form of a non-tradeable contingent value right (“CVR”). As a result of the Merger, Nexstar acquired 71 full power stations (net of seven stations divested) in 42 markets. See Note 3 for additional information.

 

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.

Effective January 17, 2017, Nexstar assumed local service agreements to provide sales, programming and other services to stations owned by VIEs with whom Media General had agreements. Nexstar became the primary beneficiary of these VIEs and consolidated these entities as of this date. On August 2, 2016, Nexstar became the primary beneficiary of certain stations owned by West Virginia Media Holdings, LLC (“WVMH”) which were consolidated into Nexstar’s financial statements as of this date. Nexstar completed the acquisition of these stations on January 31, 2017 and they are no longer VIEs. See Note 2—Variable Interest Entities for additional information on these transactions.

 

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The following are assets of consolidated VIEs that are not available to settle the obligations of Nexstar and the liabilities of consolidated VIEs for which their creditors do not have recourse to the general credit of Nexstar (in thousands):

 

 

Liquidity

Nexstar is highly leveraged, which makes it vulnerable to changes in general economic conditions. Nexstar’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 Nexstar’s control.

 

Interim Financial Statements

The Condensed Consolidated Financial Statements as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 are unaudited. However, in the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in Nexstar’s Annual Report on Form 10-K for the year ended December 31, 2016. The balance sheet as of December 31, 2016 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.

 

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Variable Interest Entities

The Company may determine that an entity is a VIE as a result of local service agreements entered into with an entity. The term local service agreement generally refers to a contract between two separately owned television stations serving the same market, whereby the owner-operator of one station contracts with the owner-operator of the other station to provide it with administrative, sales and other services required for the operation of its station. Nevertheless, the owner-operator of each station retains control and responsibility for the operation of its station, including ultimate responsibility over all programming broadcast on its station. A local service agreement can be (1) a time brokerage agreement (“TBA”) or a local marketing agreement (“LMA”) which allows Nexstar to program most of a station’s broadcast time, sell the station’s advertising time and retain the advertising revenue generated in exchange for monthly payments, based on the station’s monthly operating expenses, (2) a shared services agreement (“SSA”) which allows the Nexstar station in the market to provide services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments as described in the SSA, or (3) a joint sales agreement (“JSA”) which permits Nexstar to sell certain of the station’s advertising time and retain a percentage of the related revenue, as described in the JSA.

Consolidated VIEs

Mission Broadcasting, Inc. (“Mission”), Marshall Broadcasting Group, Inc. (“Marshall”) and White Knight Broadcasting (“White Knight”) are consolidated by Nexstar because Nexstar is deemed under U.S. GAAP to have controlling financial interests in these entities 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 Mission’s and Marshall’s senior secured credit facilities (see Note 7), (3) Nexstar having power over significant activities affecting these entities’ economic performance, including budgeting for advertising revenue, certain advertising sales and, for Mission and White Knight, hiring and firing of sales force personnel and (4) purchase options granted by Mission and White Knight which permit Nexstar to acquire the assets and assume the liabilities of each Mission and White Knight station, subject to Federal Communications Commission (“FCC”) consent.

In connection with Nexstar’s Merger with Media General consummated on January 17, 2017, Nexstar began to provide sales, programming and other services to stations owned by VIEs with whom Media General had agreements. These VIEs are Shield Media, LLC (“Shield”), Vaughan Media, LLC (“Vaughan”), Tamer Media, LLC (“Tamer”) and Super Towers, Inc. (“Super Towers”). Nexstar became the primary beneficiary of these VIEs as of the closing date of the Merger because of (1) the local service agreements Nexstar assumed with these VIEs’ stations, (2) Nexstar’s guarantee of the outstanding obligations under Shield’s senior secured credit facility (Note 7), (3) Nexstar having power over significant activities affecting these entities’ economic performance, including budgeting for advertising revenue, advertising sales and hiring and firing of sales force personnel and (4) purchase options granted by Shield, Vaughan, Tamer and Super Towers that permit Nexstar to acquire the assets and assume the liabilities of each of these VIEs’ stations at any time, subject to FCC consent. Therefore, the financial results and financial position of these entities have been consolidated by Nexstar in accordance with the VIE accounting guidance as of January 17, 2017.

Nexstar had variable interests in the stations previously owned by WVMH as a result of TBAs effective December 1, 2015 and an agreement to acquire the assets of these stations dated November 16, 2015. On August 2, 2016, Nexstar received approval from the FCC to acquire these stations. Nexstar re-evaluated the business arrangements with these stations as of this date and determined that it was the primary beneficiary of the variable interests because it had the ultimate power to direct the activities that most significantly impact the economic performance of the stations, including developing the annual operating budget, programming and oversight and control of sales management personnel. Therefore, Nexstar consolidated the WVMH stations as of August 2, 2016. The final closing of this acquisition was completed on January 31, 2017. Thus, Nexstar no longer has variable interests in these stations. See Note 3 for additional information.

Nexstar had a variable interest in Parker Broadcasting of Colorado, LLC (“Parker”), the owner of station KFQX, pursuant to a TBA which Nexstar assumed effective June 13, 2014. Nexstar evaluated the business arrangement with Parker as of this date and determined that it was the primary beneficiary of the variable interest because it had the ultimate power to direct the activities that most significantly impact the economic performance of the station, including developing the annual operating budget, programming and oversight and control of sales management personnel. Therefore, Nexstar consolidated Parker as of June 13, 2014. On March 31, 2017, Mission acquired the outstanding equity of Parker and effectively acquired Parker’s TBA with Nexstar. Thus, Nexstar no longer has a variable interest in Parker and deconsolidated its accounts. However, since Nexstar is the primary beneficiary of variable interests in Mission, it retained a beneficial financial interest in KFQX and, therefore, continued to consolidate this station. See Note 3 for additional information.

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The following table summarizes the various local service agreements Nexstar had in effect as of September 30, 2017 with Mission, Marshall, White Knight, Shield, Vaughan, Tamer and Super Towers:

 

Nexstar’s ability to receive cash from Mission, Marshall, White Knight, Shield, Vaughan, Tamer and Super Towers 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, Mission, Marshall, White Knight, Shield, Vaughan, Tamer and Super Towers maintain complete responsibility for and control over programming, finances, personnel and operations of their stations.

The carrying amounts and classification of the assets and liabilities of the VIEs which have been included in the Condensed Consolidated Balance Sheets were as follows (in thousands):

 

 

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Non-Consolidated VIEs

Nexstar has an outsourcing agreement with Cunningham Broadcasting Corporation (“Cunningham”), which continues through December 31, 2017. 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 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.

Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, broadcast rights, accounts payable, broadcast rights payable and accrued expenses approximate fair value due to their short-term nature.

See Note 3 for fair value disclosures of spectrum asset, contingent consideration liability (CVR) and liability to surrender spectrum in connection with Nexstar’s merger with Media General. See Note 7 for fair value disclosures related to the Company’s debt.

Pension plans and postretirement benefits

A determination of the liabilities and cost of the Company’s pension and other postretirement plans requires the use of assumptions. The actuarial assumptions used in the Company’s pension and postretirement reporting are reviewed annually with independent actuaries and are compared with external benchmarks, historical trends and the Company’s own experience to determine that its assumptions are reasonable. The assumptions used in developing the required estimates include the following key factors: discount rates, expected return on plan assets, mortality rates, health care cost trends, retirement rates and expected contributions. The amount by which the projected benefit obligation exceeds the fair value of the pension plan assets is recorded in other noncurrent liabilities in the accompanying Condensed Consolidated Balance Sheet.

 

Income Per Share

Basic income per share is computed by dividing the net income attributable to Nexstar 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 stock 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):

 

Stock options and restricted stock units to acquire a weighted average of 20,000 shares and 224,000 shares for the three months ended September 30, 2017 and 2016, respectively, and 199,000 shares and 468,000 shares during the nine months ended September 30, 2017 and 2016, respectively, of Class A common stock were excluded from the computation of diluted earnings per share, because their impact would have been anti-dilutive.

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Basis of Presentation

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income or stockholders’ equity as previously reported.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which updates the accounting guidance on revenue recognition. This standard is intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations to clarify the implementation of guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance in identifying performance obligations in a contract and determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. This update amends the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition and is intended to address implementation issues that were raised by stakeholders and provide additional practical expedients. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which makes minor corrections or minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. In September 2017, the FASB issued ASU No. 2017-13, Revenue recognition (Topic 605), Revenue from contracts with customers (Topic 606), Leases (Topic 840) and Leases (Topic 842), which allows certain public entities to use the private company effective dates for adoption of ASC 606 and supersedes certain SEC paragraphs in the Codification. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard.

 

The above updates are effective for interim and annual reporting periods beginning after December 15, 2017. The Company will adopt these updates effective January 1, 2018 under the modified retrospective approach. Based on our evaluation performed to date, we believe that approximately 90% of the reported gross revenue in 2016 will not be materially impacted by the new guidance. Our television spot advertising contracts, which comprise approximately 60% of the reported gross revenue in 2016, are short-term in nature. We expect revenue will continue to be recognized when commercials are aired. We also expect that revenue earned under retransmission agreements will be recognized under the licensing of intellectual property guidance in the standard, which will not have a material change to our current revenue recognition. This revenue source comprised approximately 30% of the 2016 reported gross revenue. The Company is in the process of finalizing its evaluation of online digital and other revenue sources.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). The new guidance requires the recording of assets and liabilities arising from leases on the balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements.  The new guidance is expected to provide transparency of information and comparability among organizations. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the provisions of the accounting standard update.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company has applied the change in accounting as of January 1, 2017 and excess tax benefits and tax deficiencies related to stock-based compensation are now recognized within income tax expense. Additionally, excess tax benefits are now classified along with other income tax cash flows as an operating activity in the condensed consolidated statements of cash flows. As such, the amounts previously reported as cash flows from operating activities were increased by $13.4 million and the amount previously reported as cash flows from financing activities were decreased by $13.4 million in the Condensed Consolidated Statement of Cash Flows during the nine months ended September 30, 2016. The change in accounting principle did not impact the Company’s stockholders’ equity.

 

 

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In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). The amendments of ASU 2016-16 were issued to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The current guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party which has resulted in diversity in practice and increased complexity within financial reporting. The amendments of ASU 2016-16 would require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and do not require new disclosure requirements. The amendments of ASU 2016-16 are effective for annual reporting periods beginning after December 15, 2017. The Company has applied the change in accounting as of January 1, 2017 using the modified retrospective approach. This adoption impacted Nexstar’s previous treatment of tax gain on the sale of WTVW to Mission in 2011. As such, the amounts previously reported as other noncurrent assets, deferred tax liabilities and accumulated deficit in the condensed consolidated balance sheet were decreased by $1.3 million, $2.1 million and $0.8 million, respectively.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB Emerging Issues Task Force (ASU 2016-18), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of these updates on its financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. To be considered a business under the new guidance, it must include an input and a substantive process that together significantly contribute to the ability to create output. The amendment removes the evaluation of whether a market participant could replace missing elements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and will be applied prospectively. The potential impact of this new guidance will be assessed for future acquisitions or dispositions, but it is not expected to have a material impact on the Company's consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04). The standard removes Step 2 of the goodwill impairment test, which requires a company to perform procedures to determine the fair value of a reporting unit's assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, a goodwill impairment charge will now be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU No. 2017-04 will be effective for fiscal years beginning on January 1, 2020, including interim periods within those fiscal years, and early adoption as of January 1, 2017 is permitted. The new guidance is required to be applied on a prospective basis and as such, the Company will use the simplified test in its annual fourth quarter 2017 testing. The new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, ASU 2017-07 requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The amendment should be applied retrospectively for the presentation of the service cost component and prospectively for the capitalization of the service cost component. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted at the beginning of any annual period for which an entity’s financial statements have not been issued or made available for issuance. The Company is currently evaluating the impact of the provisions of this accounting standard update.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) – Scope of Modification Accounting (ASU 2017-09).  ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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3.  Acquisitions and Dispositions

 

Merger with Media General

 

On January 17, 2017 (the “Closing Date”), Nexstar completed its previously announced Merger with Media General. Prior to the completion of the Merger, Media General owned, operated or serviced 78 full power television stations in 48 markets. In connection with the Merger, Nexstar sold the assets of seven of Media General’s full power television stations in seven markets. The full power television stations acquired and/or consolidated by Nexstar as a result of the Merger, net of divestitures, are as follows:

 

 

As discussed in Note 2, Nexstar is the primary beneficiary of its variable interests in Shield, Tamer, Vaughan and Super Towers and has consolidated these entities, including the stations they own.

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Upon the completion of the Merger, each issued and outstanding share of common stock, no par value, of Media General (“Media General Common Stock”) immediately prior to the effective time of the Merger, other than shares or other securities representing capital stock in Media General owned, directly or indirectly, by Nexstar or any subsidiary of Media General, was converted into the right to receive (i) $10.55 in cash, without interest (the “Cash Consideration”), (ii) 0.1249 of a share of Nexstar’s Class A Common Stock (the “Nexstar Common Stock”), par value $0.01 per share (the “Stock Consideration”), and (iii) one non-tradeable CVR representing the right to receive a pro rata share of the net proceeds from the disposition of Media General’s spectrum in the FCC’s recently concluded spectrum auction (the “FCC auction”), subject to and in accordance with the contingent value rights agreement governing the CVRs (the CVR, together with the Stock Consideration and the Cash Consideration, the “Merger Consideration”). The CVRs are not transferable, except in limited circumstances specified in the agreement governing the CVRs.

 

Upon the completion of the Merger, each unvested Media General stock option outstanding immediately prior to the Effective Time became fully vested and was converted into an option to purchase Nexstar Common Stock at the same aggregate price as provided in the underlying Media General stock option, with the number of shares of Nexstar Common Stock adjusted to account for the Cash Consideration and the exchange ratio for the Stock Consideration. Additionally, the holders of Media General stock options received one CVR for each share subject to the Media General stock option immediately prior to the Effective Time. All other equity-based awards of Media General outstanding immediately prior to the Merger vested in full and were converted into the right to receive the Merger Consideration.

  

The following table summarizes the components of the total consideration paid, payable or issued on the Closing Date in connection with the Merger (in thousands):

 

 

Concurrent with the closing of the Merger, Nexstar sold the assets of 12 full power television stations in 12 markets, five of which were previously owned by Nexstar and seven of which were previously owned by Media General. Nexstar sold the Media General stations for a total consideration of $427.6 million and recognized a loss on disposal of $4.7 million (the “Media General Divestitures”). Nexstar sold its stations for $114.4 million and recognized gain on disposal of $62.4 million (the “Nexstar Divestitures”). The gain and loss recognized from these divestitures were included as a separate line item in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017.

 

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Subject to final determination, which is expected to occur within 12 months of the acquisition date, the provisional fair values of the assets acquired and liabilities assumed (net of the effects of the Media General Divestitures but including the consolidation of the assets and liabilities of Shield, Tamer, Vaughan and Super Towers) are as follows (in thousands):

 

 

The estimated acquisition date fair value of Media General’s spectrum auctioned with the FCC (spectrum asset) is $466.2 million and is calculated as gross proceeds, less estimated costs associated with surrendering the spectrum to the FCC. The estimated fair value of the CVR is $272.3 million and is calculated as the gross proceeds, less estimated transaction expenses and repacking expenses and less taxes as defined in the CVR agreement. The fair value measurements of the spectrum asset and the CVR are considered Level 3 as significant inputs are unobservable to the market.

 

On July 21, 2017, the Company received the $478.6 million of gross proceeds from the disposition of Media General’s spectrum in the recently concluded FCC auction. Nexstar did not dispose the spectrum of its legacy stations.

 

On August 28, 2017, Nexstar completed the $258.6 million initial payments of the CVR to the holders, which represents the majority of the estimated fair value. In September 2017, Nexstar paid the initial taxes due associated with the proceeds from relinquishing Media General’s spectrum of $145.9 million.

 

As of September 30, 2017, the Company has not surrendered any of the spectrum auctioned with the FCC. Thus, the spectrum assets were retained ($340.7 million included in current assets and $127.0 million included in other noncurrent assets in the accompanying condensed consolidating balance sheet). Accordingly, the gross proceeds received from the FCC were accounted for as liabilities to surrender spectrum. In the accompanying condensed consolidated balance sheet, $348.6 million is included in current liabilities, for spectrum that are projected to be surrendered within the next 12 months, and $130.0 million is included in other noncurrent liabilities, for spectrum that are projected to be surrendered in 2019 and 2020. Both current and noncurrent liabilities to surrender the spectrum will be reduced upon the relinquishment.

 

The fair value assigned to goodwill is attributable to future expense reductions utilizing management’s leverage in operating costs. The intangible assets related to the network affiliation agreements are amortized over 15 years. Other intangible assets are amortized over an estimated weighted average useful life of 17 years. The carryover of the tax basis in goodwill, FCC licenses, network affiliation agreements, other intangible assets and property and equipment of $159.0 million, $294.3 million, $31.7 million, $40.4 million and $247.8 million, respectively, are deductible for tax purposes.

 

Nexstar assumed the $400.0 million 5.875% Senior Notes due 2022 (the “5.875% Notes”) previously issued by LIN Television Corporation, a wholly owned subsidiary of Media General (“LIN TV”). Nexstar also consolidated Shield’s senior secured credit facility with an outstanding Term Loan A principal balance of $24.8 million. These debts were assumed at fair values on the Merger Closing Date. See Note 7 for additional information.

 

Nexstar also assumed Media General’s pension and postretirement obligations (included in other noncurrent liabilities). See Note 6 for additional information.

 

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The consolidation of Shield, Tamer, Vaughan and Super Towers resulted in noncontrolling interests of $7.6 million, representing the residual fair value attributable to the owners of these entities as of January 17, 2017, estimated by applying the income approach valuation technique.

 

The Cash Consideration, the repayment of Media General debt, including premium and accrued interest, and the related fees and expenses were funded through a combination of cash on hand, proceeds from the Nexstar Divestitures and the Media General Divestitures and new borrowings discussed in Note 7.

 

During 2017, Nexstar recorded measurement period adjustments, including (i) the result of our ongoing valuation procedures on acquired intangible assets which decreased the FCC licenses by $209.9 million and increased the network affiliation agreements and other intangible assets by $176.9 million and $4.6 million, respectively, (ii) a change in the estimated fair value of Media General’s spectrum asset which increased by $24.6 million, (iii) changes in the estimate of collectability of accounts receivable and various fair value assumptions, which decreased the estimated fair value of accounts receivable by $22.3 million, (iv) an increase in goodwill of $25.2 million and decreases in income tax payable and deferred tax liabilities of $5.4 million and $2.2 million, respectively, due to the measurement period adjustments discussed in (i) through (iii), and (v) reclassifications from other noncurrent assets to prepaid expenses and other current assets and reclassifications between accounts payable, accrued expenses, and other noncurrent liabilities. None of these measurement period adjustments had a material impact on the Company’s results of operations.

 

The acquisition’s net revenue of $1.02 billion and operating income of $200.9 million from January 17, 2017 to September 30, 2017 have been included in the accompanying Condensed Consolidated Statements of Operations.

 

Transaction costs relating to the Merger, including legal and professional fees and severance costs of $1.1 million and $0.9 million, were expensed as incurred during the three months ended September 30, 2017 and 2016, respectively, and $52.2 million and $7.1 million during the nine months ended September 30, 2017 and 2016, respectively. These costs were included in selling, general and administrative expense, excluding depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations.

 

WVMH

 

On November 16, 2015, Nexstar entered into a definitive agreement to acquire the assets of three CBS and one NBC full power television stations from WVMH for $130.0 million in cash, subject to adjustments for working capital. The stations affiliated with CBS are WOWK in the Charleston-Huntington, West Virginia market, WTRF in the Wheeling, West Virginia-Steubenville, Ohio market and WVNS in the Bluefield-Beckley-Oak Hill, West Virginia market. WBOY in the Clarksburg-Weston, West Virginia market is affiliated with NBC. The acquisition will allow Nexstar entrance into these markets. Nexstar provided programming and sales services to these stations pursuant to a TBA from December 1, 2015 through the completion of the acquisition.

 

On January 4, 2016, Nexstar completed the first closing of the transaction and acquired the stations’ assets excluding certain transmission equipment, the FCC licenses and network affiliation agreements for $65.0 million, including a deposit paid upon signing the purchase agreement of $6.5 million, all funded through a combination of cash on hand and borrowings under Nexstar’s revolving credit facility in 2016.

 

The fair values of the assets acquired and liabilities assumed in the first closing are as follows (in thousands):

 

 

Other intangible assets are amortized over an estimated weighted average useful life of three years.

 

 

 

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As discussed in Note 2, Nexstar became the primary beneficiary of its variable interests in WVMH’s stations upon receiving FCC approval on August 2, 2016 to acquire the stations’ remaining assets. Therefore, Nexstar has consolidated these remaining assets under authoritative guidance related to the consolidation of VIEs as of this date. The fair values of the assets consolidated were as follows (in thousands):

 

 

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 15 years.

 

On January 31, 2017, Nexstar completed its acquisition of the remaining assets of the WVMH stations. As such, Nexstar paid the owners the remaining purchase price of $66.9 million, funded by cash on hand, and utilized its $43.5 million balance of deposit previously paid to the owners to acquire the noncontrolling interest of $108.7 million.

 

The stations’ net revenue of $37.7 million and operating income of $7.8 million during the nine months ended September 30, 2017 have been included in the accompanying Condensed Consolidated Statements of Operations. No significant transaction costs were incurred during the nine months ended September 30, 2017 and September 30, 2016.

 

Parker

 

On May 27, 2014, Mission assumed the rights, title and interest to an existing purchase agreement to acquire Parker, the owner of television station KFQX, the FOX affiliate in the Grand Junction, Colorado market, for $4.0 million in cash, subject to adjustments for working capital. In connection with this assumption, Mission paid a deposit of $3.2 million on June 13, 2014. The acquisition was approved by the FCC in February 2017 and met all other customary conditions in March 2017. On March 31, 2017, Mission completed this acquisition and paid the remaining purchase price of $0.8 million, funded by cash on hand. The acquisition allows Mission entrance into this market.

 

Subject to final determination, which is expected to occur within 12 months of the acquisition date, the provisional fair values of the assets acquired and liabilities assumed are as follows (in thousands):

 

 

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 15 years.

 

As discussed in Note 2, Nexstar had a variable interest in Parker and had consolidated this entity until Mission acquired Parker’s outstanding equity. Since Nexstar no longer has variable interests in Parker, its accounts were deconsolidated from Nexstar’s financial statements. However, since Nexstar is the primary beneficiary of variable interests in Mission, it retained a beneficial financial interest in KFQX and continued to consolidate this station. See Note 2 for more discussion on VIEs.

 

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WLWC-TV

 

On October 2, 2017, Nexstar completed the acquisition of certain assets of WLWC, a CW affiliated full power television station in the Providence, Rhode Island market, from OTA Broadcasting (PVD), LLC (“OTA”) for $4.1 million in cash, subject to adjustments for working capital, funded by cash on hand.

 

Due to the timing of the WLWC acquisition, certain disclosures, including the allocation of purchase price, have been omitted because the initial accounting for the business combination was incomplete as of the filing date of this Quarterly Report on Form

10-Q.

 

Unaudited Pro Forma Information

 

The acquisition of four full power television stations from WVMH is not significant for financial reporting purposes. Therefore, pro forma information has not been provided for this acquisition.

 

The following unaudited pro forma information (in thousands) has been presented for the periods indicated as if the Merger with Media General and the related consolidation of VIEs had occurred on January 1, 2016. The unaudited pro forma information combined the historical results of Nexstar and Media General, adjusted for business combination accounting effects including transaction costs attributable to the Merger, the net gain on disposal of television stations in connection with the Merger, the depreciation and amortization charges from acquired intangible assets, the interest on new debt and the related tax effects. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal year 2016.

 

 

4.  Intangible Assets and Goodwill

Intangible assets subject to amortization consisted of the following (in thousands):

 

 

The increases in network affiliation agreements and other definite-lived intangible assets relate to Nexstar’s acquisitions, net of dispositions, as discussed in Note 3.

 

The following table presents the Company’s estimate of amortization expense for the remainder of 2017, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of September 30, 2017 (in thousands):

 

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The amounts recorded to goodwill and FCC licenses were as follows (in thousands):

 

 

Indefinite-lived intangible assets are not subject to amortization, but are tested for impairment annually or whenever events or changes in circumstances indicate that such assets might be impaired. During the nine months ended September 30, 2017, the Company did not identify any events that would trigger impairment assessment.

 

5.  Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

The increases in accrued expenses relate to Nexstar’s acquisitions as discussed in Note 3.

 

6.  Retirement and Postretirement Plans

 

As part of the Merger, Nexstar assumed Media General’s pension and postretirement obligations which were remeasured at fair value on the acquisition date.

 

As a result, Nexstar now has a funded, qualified non-contributory defined benefit retirement plan which covers certain employees and former employees of Media General and its predecessors. Additionally, there are non-contributory unfunded supplemental executive retirement and ERISA excess plans which supplement the coverage available to certain Media General executives. All of these retirement plans are frozen. Media General also had 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. Beginning with the acquisition, Nexstar recognizes the underfunded status of these plan liabilities on its Condensed Consolidated Balance Sheet. The funded status of a plan represents the difference between the fair value of plan assets and the related plan projected benefit obligation. Changes in the funded status are recognized through comprehensive income in the year in which the changes occur.

 

In conjunction with one of the divestitures concurrent with the Merger, the buyer assumed approximately $60 million of pension liability from the funded, qualified retirement plan. As of the Closing Date and following this transaction, the projected benefit obligation of the retirement plans was approximately $502 million and the plan assets at fair value were approximately $394 million resulting in a liability for retirement plans of $108 million (included in other noncurrent liabilities). In addition, the postretirement liabilities totaled approximately $23 million (included in other noncurrent liabilities).  

 

 

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The following table provides the components of net periodic benefit cost (income) for the Company’s benefit plans in 2017:

 

 

The Company has no required contributions to its qualified retirement plan in 2017. Payments to fund the obligations under the remaining plans are considered contributions and are expected to be less than $4 million in 2017.

 

7.  Debt

Long-term debt consisted of the following (in thousands):

 

2017 Transactions

In connection with the Merger, Nexstar assumed the $400.0 million 5.875% Notes due 2022 previously issued by LIN TV. Additionally, Nexstar consolidated Shield’s new senior secured credit facility with a new Term Loan A principal balance of $24.8 million due on January 17, 2022 and payable in quarterly installments that increase over time from 1.25% to 2.5% of the principal.

On January 17, 2017, the Company issued the following new term loans and new revolving loans under new senior secured credit facilities:

In January 2017, the Company recorded $48.3 million (Term Loan B) and $3.2 million (Term Loan A) in legal, professional and underwriting fees related to the new debt described above. Debt financing costs are netted against the carrying amount of the related debt.

 

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The proceeds from the new term loans and revolving loans, together with Nexstar’s proceeds from its previously issued $900.0 million 5.625% senior unsecured notes due 2024 (the “5.625% Notes”) at par, the net proceeds from certain station divestitures (See Note 3) and cash on hand were used to finance the following:

In January 2017, the refinancing of the Company’s then existing term loans and revolving loans resulted in losses on extinguishment of debt of $6.5 million and $0.3 million, respectively, representing the write-off of unamortized debt financing costs and debt premium.

On February 27, 2017, Nexstar called the entire $525.0 million principal amount of its 6.875% Notes at a redemption price equal to 103.438% of the principal plus any accrued and unpaid interest, also funded by new borrowings described above. This transaction resulted in a loss on extinguishment of debt of $22.2 million, representing premiums paid to retire the notes and write-off of unamortized debt financing costs and debt premium.

On July 19, 2017, the Company amended its senior secured credit facilities. The main provisions of the amendments include: (i) Nexstar’s additional Term Loan A borrowing of $456.0 million , issued at 99.16%, the proceeds of which were used to repay the $454.4 million outstanding principal balance of Nexstar’s Term Loan B, (ii) a reduction in the applicable margin portion of interest rates by 50 basis points, (iii) an extension of the maturity date of Nexstar’s and Shield’s Term Loan A to five years from July 19, 2017 and (iv) an extension of the maturity date of Nexstar’s and Mission’s revolving credit facilities to five years from July 19, 2017.

In July 2017, the Company recorded $2.4 million (Term Loan B), $1.8 million (Term Loan A) and $0.3 million (revolving credit facilities) in legal, professional and underwriting fees related to the amendments described above.

Through September 2017, Nexstar prepaid a total of $215.0 million in principal balance under its Term Loan B, funded by cash on hand. These resulted in a loss on extinguishment of debt of $5.0 million, representing write-off of unamortized debt financing costs and discounts. In April 2017, Nexstar prepaid $25.0 million under its Term Loan A, funded by cash on hand. This resulted in a loss on extinguishment of debt of $0.4 million, representing write-off of unamortized debt financing costs and discounts.

On October 2, 2017, Nexstar prepaid $10.0 million of the outstanding principal balance under its Term Loan B, funded by cash on hand.

On November 6, 2017, Nexstar prepaid $10.0 million of the outstanding principal balance under its Term Loan B, funded by cash on hand.

Unused Commitments and Borrowing Availability

The Company had $172.0 million of total unused revolving loan commitments under its senior secured credit facilities, all of which was available for borrowing, based on the covenant calculations as of September 30, 2017. The Company’s ability to access funds under its senior secured credit facilities depends, in part, on its compliance with certain financial covenants. As of September 30, 2017, Nexstar was in compliance with its financial covenants.

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5.625% Senior Notes

On July 27, 2016, Nexstar Escrow Corporation, a wholly-owned subsidiary of Nexstar, completed the issuance and sale of $900.0 million of 5.625% Notes at par. The gross proceeds of the 5.625% Notes, plus Nexstar’s pre-funded interests, were deposited in a segregated escrow account which could not be utilized until certain conditions were satisfied. On January 17, 2017, Nexstar completed its merger with Media General. Thus, the proceeds of the 5.625% Notes plus the pre-funded interests deposited therein were released to Nexstar. The 5.625% Notes also became the senior unsecured obligations of Nexstar, guaranteed by Mission and certain of Nexstar’s and Mission’s future wholly-owned subsidiaries, subject to certain customary release conditions.

The 5.625% Notes will mature on August 1, 2024. Interest on the 5.625% Notes is payable semiannually in arrears on February 1 and August 1 of each year. The 5.625% Notes were issued pursuant to an Indenture, dated as of July 27, 2016 (the “5.625% Indenture”). The 5.625% Notes are senior unsecured obligations of Nexstar and are guaranteed by Mission and certain of Nexstar’s and Mission’s future 100% owned subsidiaries, subject to certain customary release provisions.

The 5.625% Notes are senior obligations of Nexstar and Mission but junior to the secured debt to the extent of the value of the assets securing such debt. The 5.625% Notes rank equal to the 5.875% Notes and the 6.125% senior unsecured notes due 2022 (“6.125% Notes”).

Nexstar has the option to redeem all or a portion of the 5.625% Notes at any time prior to August 1, 2019 at a price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date plus applicable premium as of the date of redemption. At any time on or after August 1, 2019, Nexstar may redeem the 5.625% Notes, in whole or in part, at the redemption prices set forth in the 5.625% Indenture. At any time prior to August 1, 2019, Nexstar may also redeem up to 40% of the aggregate principal amount at a redemption price of 105.625%, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds from equity offerings.

Upon the occurrence of a change in control (as defined in the 5.625% Indenture), each holder of the 5.625% Notes may require Nexstar to repurchase all or a portion of the 5.625% Notes in cash at a price equal to 101.0% of the aggregate principal amount to be repurchased, plus accrued and unpaid interest, if any, thereon to the date of repurchase.

The 5.625% Indenture contains covenants that limit, among other things, Nexstar’s ability to (1) incur additional debt, (2) pay dividends or make other distributions or repurchases or redeem its capital stock, (3) make certain investments, (4) create liens, (5) merge or consolidate with another person or transfer or sell assets, (6) enter into restrictions affecting the ability of Nexstar’s restricted subsidiaries to make distributions, loans or advances to it or other restricted subsidiaries, (7) prepay, redeem or repurchase certain indebtedness and (8) engage in transactions with affiliates.

The 5.625% Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount of the then outstanding 5.625% Notes may declare the principal of and accrued but unpaid interest, including additional interest, on all the 5.625% Notes to be due and payable.

In 2016, Nexstar recorded $15.7 million in legal, professional and underwriting fees related to the issuance of the 5.625% Notes, which were recorded as debt finance costs and are being amortized over the term of the 5.625% Notes. Debt financing costs are netted against the carrying amount of the related debt.

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5.875% Senior Notes

As part of the Company’s Merger with Media General on January 17, 2017, Nexstar assumed the $400.0 million 5.875% Senior Notes due 2022 previously issued by LIN TV.

The 5.875% Notes will mature on November 15, 2022. Interest on the 5.875% Notes is payable semiannually in arrears on May 15 and November 15 of each year. The 5.875% Notes were issued pursuant to an Indenture, dated as of November 5, 2014 (the “5.875% Indenture”). The 5.875% Notes are senior unsecured obligations of Nexstar and certain of Nexstar’s future 100% owned subsidiaries, subject to certain customary release provisions.

The 5.875% Notes are senior obligations of Nexstar but junior to the secured debt, to the extent of the value of the assets securing such debt. The 5.875% Notes rank equal to the 5.625% Notes and the 6.125% Notes.

Nexstar has the option to redeem all or a portion of the 5.875% Notes at any time prior to November 15, 2017 at a price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date plus applicable premium as of the date of redemption. At any time on or after November 15, 2017, Nexstar may redeem the 5.875% Notes, in whole or in part, at the redemption prices set forth in the 5.875% Indenture. At any time before August 1, 2019, Nexstar may also redeem the 5.875% Notes at 105.875% of the aggregate principal amount at a redemption price, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds from equity offerings, provided that (1) at least $200.0 million aggregate principal amount of 5.875% Notes issued under the 5.875% Indenture remains outstanding after each such redemption and (2) the redemption occurs within 90 days after the closing of the note offering.

Upon the occurrence of a change of control (as defined in the 5.875% Indenture), each holder of the 5.875% Notes may require Nexstar to repurchase all or a portion of the 5.875% Notes in cash at a price equal to 101.0% of the aggregate principal amount to be repurchased, plus accrued and unpaid interest, if any, thereon to the date of repurchase.

The 5.875% Indenture contains covenants that limit, among other things, Nexstar’s ability to (1) incur additional debt, (2) make certain restricted payments, (3) consummate specified asset sales, (4) enter into transactions with affiliates, (5) create liens, (6) pay dividends or make other distributions, (7) repurchase or redeem capital, (8) merge or consolidate with another person and (9) enter new lines of business.

The 5.875% Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the 5.875% Indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments, certain events of bankruptcy and insolvency and any guarantee of the 5.875% Notes that ceases to be in full force and effect with certain exceptions specified in the 5.875% Indenture. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount of the then outstanding notes may declare the principal of and accrued but unpaid interest, including additional interest, on all the notes to be due and payable.

Collateralization and Guarantees of Debt

The Company’s credit facilities described above are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses and the other assets of consolidated VIEs unavailable to creditors of Nexstar (See Note 2). Nexstar guarantees full payment of all obligations incurred under the Mission, Marshall and Shield senior secured credit facilities in the event of their default. Mission and Nexstar Digital, LLC, a wholly-owned subsidiary of Nexstar (formerly Enterprise Technology, LLC and herein referred to as “Nexstar Digital”), are guarantors of Nexstar’s senior secured credit facility. Mission is also a guarantor of Nexstar’s 6.125% Notes and the 5.625% Notes but does not guarantee Nexstar’s 5.875% Notes. Nexstar Digital does not guarantee any of the notes. Marshall and Shield are not guarantors of any debt within the group.

In consideration of Nexstar’s guarantee of the Mission senior secured credit facility, Mission has granted Nexstar purchase options to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. These option agreements (which expire on various dates between 2017 and 2024) 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 4.50 to 1.00. The financial covenant, which is formally calculated on a quarterly basis, is based on the combined results of the Company. The Mission, Marshall and Shield amended credit agreements do not contain financial covenant ratio requirements, but do provide for default in the event Nexstar does not comply with all covenants contained in its credit agreement. As of September 30, 2017, the Company was in compliance with its financial covenant.

 

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Fair Value of Debt

The aggregate carrying amounts and estimated fair values of the Company’s debt were as follows (in thousands):

 

 

 

8.  Common Stock

 

As discussed in Note 3, Nexstar issued Common Stock in connection with its Merger with Media General consummated on January 17, 2017.

 

On June 12, 2017, Nexstar announced that its Board of Directors had approved an increase in the Company’s share repurchase authorization to repurchase up to an additional $100 million of its Class A common stock. The Board of Directors’ prior authorization in August 2015 to repurchase the Company’s Class A common stock up to $100 million was depleted due to shares repurchased during the second quarter of 2017. 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 the Company is required to repurchase and the repurchase program may be suspended or discontinued at any time without prior notice. During the nine months ended September 30, 2017, Nexstar repurchased a total of 1,689,132 shares of Class A common stock for $99.0 million, funded by cash on hand. As of September 30, 2017, the remaining available amount under the share repurchase authorization was $52.4 million.

 

9.  Stock-Based Compensation Plans

 

During the three months ended September 30, 2017, Nexstar granted 33,750 restricted stock units with an estimated fair value of $1.9 million. During the nine months ended September 30, 2017, Nexstar granted 1,071,250 restricted stock units with an estimated fair value of $68.6 million and 228,438 vested stock options with an estimated fair value of $10.7 million.

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10.  Income Taxes

 

Income tax expense was $32.0 million for the three months ended September 30, 2017, compared to $17.5 million for the same period in 2016. The effective tax rates were 43.2% and 40.6% for each of the respective periods. This increase is primarily caused by permanent differences in 2017 resulting in income tax expense of $2.4 million, or a 2.9% increase to the effective income tax rate.

 

Income tax expense was $58.4 million for the nine months ended September 30, 2017, compared to $50.9 million for the same period in 2016. The effective tax rates were 38.0% and 41.2% for each of the respective periods. In 2017, the Company recognized the tax impact of the divested stations previously owned by Nexstar (See Note 3) which resulted in an income tax benefit of $7.8 million, or a 5.1% decrease to the effective tax rate. The income tax benefit was primarily the result of proceeds received which will not be subject to taxation. The Company adopted ASU No. 2016-09 as of January 1, 2017 (See Recent Accounting Pronouncements below) which now requires excess tax benefits and tax deficiencies related to stock-based compensation to be recognized within income tax expense. As such, Nexstar recognized an income tax benefit related to stock option exercises and the vesting of restricted stock units of $1.2 million, or a 0.8% decrease to the effective rate. The Company also released an uncertain tax position resulting in an income tax benefit of $1.6 million, or a 1.1% decrease to the effective tax rate. Permanent differences in 2017 resulted in an increase in income tax expense of $4.4 million, or a 2.8% increase to the effective income tax rate. Prior year transaction costs attributable to the Merger (See Note 3) were determined to be nondeductible for tax purposes resulting in an income tax expense of $1.7 million in 2017, or a 1.1% increase to the effective tax rate. The Merger and the subsequent liquidation of Media General legal entities increased the blended state tax rate in 2017 resulting in an income tax expense of $1.5 million, or a 1.0% increase to the effective tax rate. In 2016, a nondeductible change in contingent consideration fair value of $1.3 million resulted in a 1.0% increase in the 2016 effective tax rate.  

 

11.  FCC Regulatory Matters

 

Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the “Communications Act”). The Communications Act prohibits the operation of television broadcasting stations except under a license issued by the FCC, and empowers the FCC, among other things, to issue, revoke, and modify broadcasting licenses, determine the location of television stations, regulate the equipment used by television stations, adopt regulations to carry out the provisions of the Communications Act and impose penalties for the violation of such regulations. The FCC’s ongoing rule making proceedings could have a significant future impact on the television industry and on the operation of the Company’s stations and the stations to which it provides services. In addition, the U.S. Congress may act to amend the Communications Act or adopt other legislation in a manner that could impact the Company’s stations, the stations to which it provides services and the television broadcast industry in general.

 

The FCC has adopted rules with respect to the final conversion of existing low power and television translator stations to digital operations, which must be completed in 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 existing local television ownership rule and radio/television cross-ownership rule (with minor technical modifications to address the transition to digital television broadcasting), (2) extended the current ban on common ownership of two top-four television stations in a market to network affiliation swaps, (3) retained the existing ban on newspaper/broadcast cross-ownership in local markets while considering waivers and providing an exception for failed or failing entities, (4) retained the existing dual network rule, (5) made JSA relationships attributable interests and (6) defined a category of sharing agreements designated as SSAs between stations and required public disclosure of those SSAs (while not considering them attributable).

 

The 2016 Ownership Order reinstated a rule that attributes 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 joint sales agreement (this rule had been previously adopted in 2014, but was vacated by the U.S. Court of Appeals for the Third Circuit).  Parties to JSAs entered into prior to March 31, 2014 may continue to operate under those JSAs until September 30, 2025.

 

 

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Nexstar and other parties filed petitions seeking reconsideration of various aspects of the 2016 Ownership Order.  On October 26, 2017, the FCC released the draft text of an order (the “Reconsideration Order”) addressing the petitions for reconsideration.  The Reconsideration Order, if adopted as drafted, would (1) eliminate the rules prohibiting newspaper/broadcast cross-ownership and limiting television/radio cross-ownership, (2) eliminate the requirement that eight or more independently-owned television stations remain in a local market for common ownership of two television stations in that market to be permissible, (3) retain the general prohibition on common ownership of two “top four” stations in a local market but provide for case-by-case review, (4) eliminate the television JSA attribution rule, and (5) retain the SSA definition and disclosure requirement for television stations.  The FCC is expected to adopt the Reconsideration Order on November 16, 2017.

 

On February 3, 2017, the FCC terminated in full its guidance (issued on March 12, 2014) requiring careful scrutiny of broadcast television applications which propose sharing arrangements and contingent interests.  Accordingly, the FCC no longer evaluates whether options, loan guarantees and similar otherwise non-attributable interests create undue financial influence in transactions which also include sharing arrangements between television stations.

 

The FCC’s media ownership rules limit the percentage of U.S. television households which a party may reach through its attributable interests in television stations to 39% on a nationwide basis.  Historically, the FCC has counted the ownership of an ultra-high frequency (“UHF”) station as reaching only 50% of a market’s percentage of total national audience. On August 24, 2016, the FCC adopted a Report and Order abolishing the UHF discount for the purposes of a licensee’s determination of compliance with the 39% national cap, and that rule change became effective in October 2016. On April 20, 2017, the FCC adopted an order on reconsideration that reinstated the UHF discount.  That order stated that the FCC would launch a comprehensive rulemaking later in 2017 to evaluate the UHF discount together with the national ownership limit.  The FCC’s April 2017 reinstatement of the UHF discount became effective on June 15, 2017, when the U.S. Court of Appeals for the D.C. Circuit denied a request to stay the reinstatement. A petition for review of the FCC’s order reinstating the UHF discount remains pending in that court, and Nexstar has intervened in the litigation in support of the FCC. Nexstar is in compliance with the 39% national cap limitation without the UHF discount and, therefore, with the UHF discount as well.

 

Spectrum

 

The FCC is in the process of repurposing a portion of the broadcast television spectrum for wireless broadband use.  Pursuant to federal legislation enacted in 2012, the FCC has conducted an incentive auction for the purpose of making additional spectrum available to meet future wireless broadband needs. Under the auction statute and rules, certain television broadcasters accepted bids from the FCC to voluntarily relinquish all or part of their spectrum in exchange for consideration, and certain wireless broadband providers and other entities submitted successful bids to acquire the relinquished television spectrum.  Over the next several years, television stations that are not relinquishing their spectrum will be “repacked” into the frequency band still remaining for television broadcast use.

 

The incentive auction commenced on March 29, 2016 and officially concluded on April 13, 2017.  Ten of Nexstar’s stations and one station owned by Vaughan accepted bids to relinquish their spectrum. Of these 11 total stations, eight will share a channel with another station, two will move to a VHF channel and one station will discontinue its operation. The one station that will discontinue its operation is not expected to have a significant impact on our future financial results because it is located in a remote rural area of the country and the Company has other stations which serve the same area. The 11 stations will be required to cease broadcasting on their current channels (and, if applicable, implement channel sharing arrangements) between August 26, 2017 and July 22, 2018, with the exception of the stations moving to VHF channels, which must vacate their current channels by September 2019 and May 2020, respectively.

 

The majority of the Company’s television stations did not accept bids to relinquish their television channels.  Of those stations, 61 full power stations owned by Nexstar and 17 full power stations owned by VIEs have been assigned to new channels in the reduced post-auction television band.  These “repacked” stations are required to construct and license the necessary technical modifications to operate on their new assigned channels, and will need to cease operating on their existing channels, by deadlines which the FCC has established and which are no later than July 13, 2020. Congress has allocated up to an industry-wide total of $1.75 billion to reimburse television broadcasters and MVPDs for costs reasonably incurred due to the repack.  This fund is not available to reimburse repacking costs for stations which are surrendering their spectrum and entering into channel sharing relationships.  Broadcasters and MVPDs have submitted estimates to the FCC of their reimbursable costs. As of October 17, 2017, these costs exceeded $1.86 billion (over $100 million more than the amount authorized by Congress), and the FCC has indicated that it expects those costs to rise.  We cannot determine if the FCC will be able to fully reimburse our repacking costs as this is dependent on certain factors, including our ability to incur repacking costs that are equal to or less than the FCC’s allocation of funds to us and whether the FCC will have available funds to reimburse us for additional repacking costs that we previously may not have anticipated. Whether the FCC will have available funds for additional reimbursements will also depend on the repacking costs that will be incurred by other broadcasters and MVPDs that are also seeking reimbursements.

 

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The reallocation of television spectrum to broadband use may be to the detriment of the Company’s investment in digital facilities, could require substantial additional investment to continue current operations, and may require viewers to invest in additional equipment or subscription services to continue receiving broadcast television signals. The Company cannot predict the impact of the incentive auction and subsequent repacking on its business.

 

Retransmission Consent

On March 3, 2011, the FCC initiated a Notice of Proposed Rulemaking to reexamine its rules (i) governing the requirements for good faith negotiations between multichannel video program distributors (“MVPDs”) and broadcasters, including implementing a prohibition on one station negotiating retransmission consent terms for another station under a local service agreement; (ii) for providing advance notice to consumers in the event of dispute; and (iii) to extend certain cable-only obligations to all MVPDs. The FCC also 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 during a retransmission consent dispute.

 

In March 2014, the FCC adopted a rule that prohibits joint retransmission consent negotiation between television stations in the same market which are not commonly owned and which are ranked among the top four stations in the market in terms of audience share.  On December 5, 2014, federal legislation extended the joint negotiation prohibition to all non-commonly owned television stations in a market. This rule requires the independent third parties with which Nexstar has local service agreements to separately negotiate their retransmission consent agreements. The December 2014 legislation also 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. The proceeding remains open.

 

Concurrently with its adoption of the prohibition on certain joint retransmission consent negotiations, the FCC also adopted a further notice of proposed rulemaking which seeks additional comment on the elimination or modification of the network non-duplication and syndicated exclusivity rules. The FCC’s prohibition on certain joint retransmission consent negotiations and its 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 or the FCC’s prohibition on certain joint negotiations, on its business.

 

Further, certain online video distributors and other over-the-top video distributors (“OTTDs”) have begun streaming broadcast programming over the Internet. In June 2014, the U.S. Supreme Court held that an OTTD’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 OTTDs 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 OTTDs.  Comments and reply comments were filed in 2015. Although the FCC has not classified OTTDs as MVPDs to date, several OTTDs have signed agreements for retransmission of local stations within their markets and others are actively seeking to negotiate such agreements.

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12.  Commitments and Contingencies

Guarantees of Mission, Marshall and Shield Debt

Nexstar and its subsidiaries guarantee full payment of all obligations incurred under the Mission, Marshall and Shield senior secured credit facilities. In the event that Mission, Marshall or Shield are 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 September 30, 2017, Mission had a maximum commitment of $229.1 million under its senior secured credit facility, of which $226.1 million of debt was outstanding, Marshall had used all of its commitment and had outstanding debt obligations of $53.0 million and Shield had also used all of its commitment and had outstanding obligations of $24.0 million. Marshall’s debt is due in June 2018 and is included in the current liabilities in the accompanying September 30, 2017 condensed consolidated balance sheet. The other debts guaranteed by Nexstar are long-term debt obligations of Mission and Shield.

Indemnification Obligations

In connection with certain agreements that the Company enters into in the normal course of its business, including local service agreements, business acquisitions and borrowing arrangements, the Company enters into contractual arrangements under which the Company agrees to indemnify the third party to such arrangement from losses, claims and damages incurred by the indemnified party for certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses and the maximum potential amount of future payments the Company could be required to make under these indemnification arrangements may be unlimited. Historically, payments made related to these indemnifications have been insignificant and the Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements.

Litigation

From time to time, the Company is involved with claims that arise out of the normal course of its business. In the opinion of management, any resulting liability with respect to these claims would not have a material adverse effect on the Company’s financial position or results of operations.

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13.  Segment Data

 

The Company evaluates the performance of its operating segments based on net revenue and operating income. The Company’s broadcast segment includes television stations and related community focused websites that Nexstar owns, operates, programs or provides sales and other services to in various markets across the United States. The other activities of the Company include corporate functions, eliminations and other insignificant operations.

 

Segment financial information is included in the following tables for the periods presented (in thousands):

 

 

 

 

 

 

 

 

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14.  Condensed Consolidating Financial Information

 

The following condensed consolidating financial information presents the financial position, results of operations and cash flows of the Company, including its wholly-owned subsidiaries and its consolidated VIEs. This information is presented in lieu of separate financial statements and other related disclosures pursuant to Regulation S-X Rule 3-10 of the Securities Exchange Act of 1934, as amended, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

 

The Nexstar column presents the parent company’s financial information, excluding consolidating entities. The Nexstar Broadcasting column presents the financial information of Nexstar Broadcasting, Inc. (“Nexstar Broadcasting”), a wholly-owned subsidiary of Nexstar and issuer of the 5.625% Notes, the 6.125% Notes and the 5.875% Notes. The Mission column presents the financial information of Mission, an entity which Nexstar Broadcasting is required to consolidate as a VIE (See Note 2). The Non-Guarantors column presents the combined financial information of Nexstar Digital LLC, a wholly-owned subsidiary of Nexstar, and other VIEs consolidated by Nexstar Broadcasting (See Note 2).

 

Nexstar Broadcasting’s outstanding 5.625% Notes and 6.125% Notes are fully and unconditionally guaranteed, jointly and severally, by Nexstar and Mission, subject to certain customary release provisions. These notes are not guaranteed by any other entities.

 

Nexstar Broadcasting’s outstanding 5.875% Notes are fully and unconditionally guaranteed, jointly and severally, by Nexstar, subject to certain customary release provisions. These notes are not guaranteed by any other entities.

 

The 5.875% Notes are the only registered debt of Nexstar. However, the indentures governing the 5.625% Notes and the 6.125% Notes also require consolidating information that presents the guarantor information.

 

As discussed in Notes 2 and 3, Nexstar Broadcasting completed its acquisition of certain television stations from WVMH in January 2017. Additionally, Mission completed its acquisition of Parker, the owner of KFQX, in March 2017. These acquisitions were deemed to be changes in the reporting entities, thus the following condensed consolidating financial information was prepared as if Nexstar Broadcasting owned and operated the WVMH stations and Mission owned and operated Parker as of the earliest period presented.

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CONDENSED CONSOLIDATING BALANCE SHEET

As of September 30, 2017

(in thousands)

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2016

(in thousands)

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2017

(in thousands)

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2016

(in thousands)

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2017

(in thousands)

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2016

(in thousands)

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2017

(in thousands)

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2016

(in thousands)

 

 

 

 

 

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15.  Subsequent Events

 

On October 2, 2017, Nexstar completed the acquisition of certain assets of WLWC, a CW affiliated television station in the Providence, Rhode Island market, from OTA Broadcasting (PVD), LLC for $4.1 million in cash, subject to adjustments for working capital, funded by cash on hand.

 

On October 2, 2017, Nexstar prepaid $10.0 million of the outstanding principal balance under its Term Loan B, funded by cash on hand.

 

On October 26, 2017, Nexstar’s Board of Directors declared a quarterly cash dividend of $0.30 per share of its Class A common stock. The dividend is payable on December 1, 2017 to stockholders of record on November 17, 2017.

 

On November 6, 2017, Nexstar prepaid $10.0 million of the outstanding principal balance under its Term Loan B, funded by cash on hand.

 

 

 

 

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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, 2016.

 

As used in this Quarterly Report on Form 10-Q and unless the context indicates otherwise, “Nexstar” refers to Nexstar Media Group, Inc. and its consolidated subsidiaries; “Nexstar Broadcasting” refers to Nexstar Broadcasting, Inc., our wholly-owned direct subsidiary; the “Company” refers to Nexstar and the variable interest entities (“VIEs”) 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 Mission, White Knight, Marshall, Shield, Vaughan, Tamer and Super Towers in accordance with U.S. GAAP, we consolidate their financial position, results of operations and cash flows as if they were wholly-owned entities. We believe this presentation is meaningful for understanding our financial performance. Refer to Note 2 to our Condensed Consolidated Financial Statements for a discussion of our determinations of VIE consolidation under the related authoritative guidance. Therefore, the following discussion of our financial position and results of operations includes the consolidated VIEs’ financial position and results of operations.

Executive Summary

2017 Highlights

 

 

 

 

Acquisitions and Dispositions

 

On January 17, 2017, we completed our previously announced merger with Media General, which owned, operated, or serviced 78 full power television stations in 48 markets. Total consideration at closing included $1.376 billion in cash consideration to stockholders of Media General, $1.031 billion issuance of Nexstar Common Stock, $1.658 billion repayment of certain then-existing debt of Media General, including premium and accrued interest, $10.7 million in replacement stock options and the CVR of $272.3 million. Concurrent with the closing of the merger, we sold the assets of 12 full power television stations in 12 markets, five of which were previously owned by us and seven of which were previously owned by Media General. We sold the Media General stations for a total consideration of $427.6 million. We sold our stations for $114.4 million. These divestitures resulted in a net gain on disposal of $57.7 million.

The cash portion of the merger, the repayment of Media General debt, including premium and accrued interest, and the related fees and expenses were funded through a combination of cash on hand, proceeds from the divestitures and new borrowings (see debt transactions below).

 

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On July 21, 2017, the Company received $478.6 million of gross proceeds from the disposition of Media General’s spectrum in the recently concluded FCC auction. On August 28, 2017, we completed the $258.6 million initial payments of the CVR to the holders, which represents the majority of the estimated fair value. In September 2017, we paid the initial taxes due associated with the proceeds from relinquishing Media General’s spectrum of $145.9 million. As of September 30, 2017, the estimated remaining amount of CVR payable to the holders was $13.6 million and the estimated remaining unpaid taxes associated with the proceeds from the spectrum was $29.1 million. See Note 3 to our Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for additional information on the above acquisitions.

Debt transactions

 

 

 

 

 

 

 

 

See also Note 7 to our Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for additional information on the above debt transactions.

 

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Overview of Operations

As of September 30, 2017, we owned, operated, programmed or provided sales and other services to 170 full power television stations, including those owned by VIEs, in 100 markets in the states of Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia and Wisconsin. The stations are affiliates of ABC, NBC, FOX, CBS, The CW, MyNetworkTV and other broadcast television networks. Through various local service agreements, we provided sales, programming and other services to 36 full power television stations owned and/or operated by independent third parties, including stations owned by Mission, Marshall, White Knight, Tamer, Vaughan, Shield and Super Towers. See Note 2—Variable Interest Entities to our Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a discussion of the local service agreements we have with these independent third parties.

We also guarantee all obligations incurred under Mission’s, Marshall’s and Shield’s senior secured credit facilities. Similarly, Mission is a guarantor of our senior secured credit facility, our 6.125% Notes and our 5.625% Notes, but does not guarantee our 5.875% Notes. Marshall and Shield do not guarantee any debt within the group. In consideration of our guarantee of Mission’s senior secured credit facility, Mission has granted us purchase options to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. These option agreements (which expire on various dates between 2017 and 2024) are freely exercisable or assignable by us without consent or approval by Mission or its shareholders. We expect these option agreements to be renewed upon expiration.

We do not own Mission, Marshall, White Knight, Shield, Vaughan, Tamer, Super Towers or their television stations. However, we are deemed under U.S. GAAP to have controlling financial interests in these entities because of (1) the local service agreements Nexstar has with their stations, (2) our guarantees of the obligations incurred under Mission’s, Marshall’s and Shield’s senior secured credit facilities, (3) our power over significant activities affecting these entities’ economic performance, including budgeting for advertising revenue, advertising sales and, for Mission, White Knight, Shield, Vaughan, Tamer and Super Towers, hiring and firing of sales force personnel and (4) purchase options granted by Mission, White Knight, Tamer, Vaughan, Shield and Super Towers that permit Nexstar to acquire the assets and assume the liabilities of each these entities’ stations, subject to FCC consent. In compliance with FCC regulations for all the parties, each of Mission, Marshall, White Knight, Shield, Vaughan, Tamer and Super Towers maintains complete responsibility for and control over programming, finances and personnel for their stations.

 

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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 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 Designated Market Area is deemed to have an attributable ownership interest in that station (this rule had been adopted in 2014 but was vacated by a federal court of appeals). Parties to existing JSAs that are deemed attributable interests and do not comply with the FCC’s local television ownership rule have until September 30, 2025 to come into compliance. Given recent legislative and FCC actions extending the compliance deadline until September 30, 2025, the Company does not expect the rule change to impact its JSA revenue in the near term. The Company has filed a petition requesting the FCC to reconsider the JSA attribution rule, and in November 2017 the FCC is expected to adopt an order on reconsideration that eliminates the rule. If the Company is ultimately required to amend or terminate its existing agreements, however, the Company could have a reduction in revenue and increased costs if it is unable to successfully implement alternative arrangements that are as beneficial as the existing JSAs.

 

The FCC is in the process of repurposing a portion of the broadcast television spectrum for wireless broadband use. In an incentive auction which concluded in April 2017, certain television broadcasters accepted bids from the FCC to voluntarily relinquish all or part of their spectrum in exchange for consideration. Television stations that are not relinquishing their spectrum will be “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 will share a channel with another station, two that will move to a VHF channel and one that will discontinue its operation. The one station that will discontinue its operation is not expected to have a significant impact on our future financial results because it is located in a remote rural area of the country and the Company has other stations which serve the same area.

 

61 full power stations owned by Nexstar and 17 full power stations owned by VIEs have been assigned to new channels in the reduced post-auction television band and will be required to construct and license the necessary technical modifications to operate on their new assigned channels on a variable schedule ending in July 2020. Congress has allocated up to an industry-wide total of $1.75 billion to reimburse television broadcasters and MVPDs for costs reasonably incurred due to the repack. The Company expects to incur costs between now and July 2020 in connection with the repack, some or all of which will be reimbursable.  If the FCC fails to fully reimburse the Company’s repacking costs, the Company could have increased costs related to the repacking.

In March 2014, the FCC amended its rule governing retransmission consent negotiations. The amended rule initially prohibited two non-commonly owned stations ranked in the top four in viewership in a market from negotiating jointly with MVPDs. On December 5, 2014, federal legislation extended the joint negotiation prohibition to all non-commonly owned television stations in a market. Our local service agreement partners are now required to separately negotiate their retransmission consent agreements with MVPDs for their stations. We cannot predict at this time the impact this amended rule will have on future negotiations with MVPDs and the impact, if any, it will have on the Company’s revenues and expenses.

Seasonality

Advertising revenue is positively affected by strong local economies, national and regional political election campaigns, and certain events such as the Olympic Games or the Super Bowl. The Company’s stations’ advertising revenue is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to, and including, the holiday season. In addition, advertising revenue is generally higher during even-numbered years, when state, congressional and presidential elections occur and advertising airs during the Olympic Games. As 2017 is not an election year or an Olympic year, we expect a decrease in advertising revenues to be reported in 2017 compared to 2016.

 

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Historical Performance

Revenue

The following table sets forth the amounts of the Company’s principal types of revenue (in thousands) and each type of revenue (other than trade and barter) as a percentage of total gross revenue:

 

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:

 

 

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Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

 

Revenue

 

Gross local advertising revenue was $224.0 million for the three months ended September 30, 2017, compared to $94.9 million for the same period in 2016, an increase of $129.1 million, or 136.1%. Gross national advertising revenue was $89.6 million for the three months ended September 30, 2017, compared to $36.5 million for the same period in 2016, an increase of $53.1 million, or 145.2%. The increase in local and national advertising revenue was primarily attributable to incremental revenue from our newly acquired stations of $195.2 million, less decreases in revenue resulting from station divestitures of $4.9 million. Our legacy stations’ local and national advertising revenue decreased by $8.1 million during the three months ended September 30, 2017 compared to the same period in 2016, which includes the impact of revenue from the 2016 Olympics on our NBC affiliate legacy stations. Our largest advertiser category, automobile, represented approximately 26% and 27% of our local and national advertising revenue for the three months ended September 30, 2017 and 2016, respectively. Overall, including past results of our newly acquired stations, automobile revenues decreased by 7.4% during the quarter. The other categories representing our top five were fast food/restaurants and furniture, which decreased in 2017, and radio/TV/cable/newspaper and attorneys, which increased in 2017.

Gross political advertising revenue was $8.4 million for the three months ended September 30, 2017, compared to $25.5 million for the same period in 2016, a decrease of $17.1 million, as 2017 is not an election year.

Retransmission compensation was $257.5 million for the three months ended September 30, 2017, compared to $98.3 million for the same period in 2016, an increase of $159.2 million, or 162.1%. The increase in retransmission compensation was attributable to incremental revenue from our newly acquired stations of $143.5 million, less decrease in revenue resulting from station divestitures of $3.8 million, and an increase in our legacy stations’ revenue of $19.5 million. The increase in revenue from our legacy stations was primarily due to the renewals of contracts providing for higher rates per subscriber (contracts generally have a three-year term) and scheduled annual escalation of rates per subscriber. In 2016, we successfully renewed our legacy stations’ retransmission compensation agreements representing approximately 50% of our legacy stations’ subscriber base. There were no significant renewals of retransmission compensation agreements during the period in 2017. Broadcasters currently deliver approximately 35% of all television viewing audiences but are paid approximately 12-14% of the total basic cable programming fees.  We anticipate continued increase of retransmission fees until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.

Digital revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $56.2 million for the three months ended September 30, 2017, compared to $28.6 million for the same period in 2016, an increase of $27.6 million, or 96.3%. This was primarily attributable to incremental revenue from our newly acquired stations and entities of $37.2 million, partially offset by a decrease in revenue as a result of rebranding and consolidation of our digital products and offerings of $9.5 million.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of our stations, were $19.9 million for the three months ended September 30, 2017, compared to $11.7 million for the same period in 2016, an increase of $8.2 million, or 70.0%. This was primarily attributable to an increase in payroll, severance, bonuses and payroll related expenses of $5.2 million and an increase in legal and professional fees of $1.1 million, both of which were primarily associated with our acquisitions and increased number of stations and entities. Additionally, new equity incentive awards during the current year increased our stock-based compensation by $3.3 million.

Station direct operating expenses, consisting primarily of news, engineering, programming and station selling, general and administrative expenses (net of trade expense) were $371.3 million for the three months ended September 30, 2017, compared to $150.1 million for the same period in 2016, an increase of $221.2 million, or 147.4%. The increase was primarily due to expenses of our newly acquired stations and entities of $225.5 million, and an increase in programming costs for our legacy stations of $8.7 million primarily related to recently enacted network affiliation agreements. Network affiliation fees have been increasing industry wide and will continue to increase over the next several years. These increases were partially offset by a $4.6 million decrease in our direct operating expenses attributable to stations divested.

Depreciation of property and equipment was $26.0 million for the three months ended September 30, 2017, compared to $12.9 million for the same period in 2016, an increase of $13.1 million, or 101.7%. The increase was primarily due to the acquisition of new assets through our merger with Media General.

Amortization of intangible assets was $34.0 million for the three months ended September 30, 2017, compared to $11.5 million for the same period in 2016, an increase of $22.5 million. The increase was primarily due to the acquisition of new intangible assets through our merger with Media General.

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Amortization of broadcast rights, excluding barter was $17.1 million for the three months ended September 30, 2017, compared to $5.2 million for the same period in 2016, an increase of $11.9 million, primarily attributable to our acquisition of new broadcast rights through our merger with Media General.

Interest Expense, net

Interest expense, net was $53.6 million for the three months ended September 30, 2017, compared to $29.6 million for the same period in 2016, an increase of $24.0 million, or 81.0%, primarily attributable to interest on new borrowings, net of decreases in interest resulting from redemptions.

Loss on Extinguishment of Debt

During the third quarter of 2017, we prepaid a total of $45.0 million principal balance under our Term Loan B. This resulted in loss on debt extinguishment of $1.2 million, representing the write-off of unamortized debt financing costs and debt discounts associated with these debt extinguishments.

Income Taxes

Income tax expense was $32.0 million for the three months ended September 30, 2017, compared to $17.5 million for the same period in 2016. The effective tax rates were 43.2% and 40.6% for each of the respective periods. This increase is primarily caused by permanent differences in 2017 resulting in income tax expense of $2.4 million, or a 2.9% increase to the effective income tax rate.

 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

Revenue

 

Gross local advertising revenue was $664.4 million for the nine months ended September 30, 2017, compared to $286.3 million for the same period in 2016, an increase of $378.1 million, or 132.1%. Gross national advertising revenue was $258.3 million for the nine months ended September 30, 2017, compared to $107.8 million for the same period in 2016, an increase of $150.5 million, or 139.5%. The increase in local and national advertising revenue was primarily attributable to incremental revenue from our newly acquired stations of $558.4 million, less decreases in revenue resulting from station divestitures of $14.1 million. Our legacy stations’ local and national advertising revenue decreased by $15.6 million during the nine months ended September 30, 2017 compared to the same period in 2016, which includes the impact of revenue from the 2016 Olympics on our NBC affiliate legacy stations. Our largest advertiser category, automobile, represented approximately 26% of our local and national advertising revenue for each of the nine months ended September 30, 2017 and 2016, respectively. Overall, including past results of our newly acquired stations, automobile revenues decreased by 4.9% during the period. The other categories representing our top five were fast food/restaurants and furniture, which decreased in 2017, and radio/TV/cable/newspaper and attorneys, which increased in 2017.

Gross political advertising revenue was $16.9 million for the nine months ended September 30, 2017, compared to $48.5 million for the same period in 2016, a decrease of $31.6 million, as 2017 is not an election year.

Retransmission compensation was $742.5 million for the nine months ended September 30, 2017, compared to $293.7 million for the same period in 2016, an increase of $448.8 million, or 152.8%. The increase in retransmission compensation was attributable to incremental revenue from our newly acquired stations of $407.6 million, less decrease in revenue resulting from station divestitures of $10.3 million, and an increase in our legacy stations revenue of $51.5 million. The increase in revenue from our legacy stations was primarily due to the renewals of contracts providing for higher rates per subscriber (contracts generally have a three-year term) and scheduled annual escalation of rates per subscriber. In 2016, we successfully renewed our legacy stations’ retransmission compensation agreements representing approximately 50% of our legacy stations’ subscriber base. There were no significant renewals of retransmission compensation agreements during the period in 2017. Broadcasters currently deliver approximately 35% of all television viewing audiences, but are paid approximately 12-14% of the total basic cable programming fees. We anticipate continued increase of retransmission fees until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.

Digital revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $166.9 million for the nine months ended September 30, 2017, compared to $76.0 million for the same period in 2016, an increase of $90.9 million, or 119.5%. This was primarily attributable to incremental revenue from our newly acquired stations and entities of $104.7 million and an increase in revenue from our legacy stations of $3.6 million, partially offset by a decrease in revenue as a result of rebranding and consolidation of our digital products and offerings of $16.4 million and a decrease in revenue resulting from station divestitures of $1.0 million.

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Operating Expenses

Corporate expenses, related to costs associated with the centralized management of our stations, were $109.1 million for the nine months ended September 30, 2017, compared to $40.6 million for the same period in 2016, an increase of $68.5 million. This was primarily attributable to an increase in payroll, severance, bonuses and payroll related expenses of $46.3 million and an increase in legal and professional fees of $14.0 million, both of which were primarily associated with our acquisitions and increased number of stations and entities. Additionally, new equity incentive awards during the current year increased our stock-based compensation by $8.5 million.

Station direct operating expenses, consisting primarily of news, engineering, programming and station selling, general and administrative expenses (net of trade expense) were $1,065.7 million for the nine months ended September 30, 2017, compared to $433.1 million for the same period in 2016, an increase of $632.6 million, or 146.0%. The increase was primarily due to expenses of our newly acquired stations and entities of $626.4 million, and an increase in programming costs for our legacy stations of $29.5 million primarily related to recently enacted network affiliation agreements. Network affiliation fees have been increasing industry wide and will continue to increase over the next several years. These increases were partially offset by an $11.2 million decrease in our direct operating expenses attributable to stations divested.

Depreciation of property and equipment was $74.5 million for the nine months ended September 30, 2017, compared to $38.2 million for the same period in 2016, an increase of $36.3 million, or 95.2%. The increase was primarily due to the acquisition of new assets through our merger with Media General.

Amortization of intangible assets was $120.7 million for the nine months ended September 30, 2017, compared to $34.9 million for the same period in 2016, an increase of $85.8 million. The increase was primarily due to the acquisition of new intangible assets through our merger with Media General.

Amortization of broadcast rights, excluding barter was $47.1 million for the nine months ended September 30, 2017, compared to $17.1 million for the same period in 2016, an increase of $30.0 million, primarily attributable to our acquisition of new broadcast rights through our merger with Media General.

In connection with our merger with Media General, we sold the assets of 12 full power television stations in 12 markets, five of which were previously owned by us and seven of which were previously owned by Media General. We sold the Media General stations for a total consideration of $427.6 million and we sold our stations for $114.4 million. These divestitures resulted in a net gain on disposal of $57.7 million.

Interest Expense, net

Interest expense, net was $188.5 million for the nine months ended September 30, 2017, compared to $70.8 million for the same period in 2016, an increase of $117.7 million, or 166.1%, primarily attributable to interest on new borrowings, net of decreases in interest resulting from redemptions, and one-time fees associated with the financing of our acquisitions.

Loss on Extinguishment of Debt

In 2017, we redeemed the entire $525.0 million principal balance under our 6.875% Notes at a redemption price equal to 103.438%, refinanced $670.8 million of the Company’s term loans and revolving loans and prepaid $240.0 million principal balance under our new term loans. These resulted in loss on debt extinguishment of $34.3 million, representing premium paid to retire the 6.875% Notes and the write-off of unamortized debt financing costs and debt discounts/premiums associated with these debt extinguishments.

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Income Taxes

Income tax expense was $58.4 million for the nine months ended September 30, 2017, compared to $50.9 million for the same period in 2016. The effective tax rates were 38.0% and 41.2% for each of the respective periods. In 2017, we recognized the tax impact of the divested stations we previously owned which resulted in an income tax benefit of $7.8 million, or a 5.1% decrease to the effective tax rate. The income tax benefit was primarily the result of proceeds we received which will not be subject to taxation. We adopted ASU No. 2016-09 as of January 1, 2017 which now requires excess tax benefits and tax deficiencies related to stock-based compensation to be recognized within income tax expense. As such, we recognized an income tax benefit related to stock option exercises and the vesting of restricted stock units of $1.2 million, or a 0.8% decrease to the effective rate. We also released an uncertain tax position resulting in an income tax benefit of $1.6 million, or a 1.1% decrease to the effective tax rate. Permanent differences in 2017 resulted in an increase in income tax expense of $4.4 million, or a 2.8% increase to the effective income tax rate. Prior year transaction costs attributable to our merger with Media General were determined to be nondeductible for tax purposes resulting in an income tax expense of $1.7 million in 2017, or a 1.1% increase to the effective tax rate. Our acquisition of Media General and the subsequent liquidation of its legal entities increased our blended state tax rate in 2017 resulting in an income tax expense of $1.5 million, or a 1.0% increase to the effective tax rate. In 2016, a nondeductible change in contingent consideration fair value of $1.3 million resulted in a 1.0% increase in the 2016 effective tax rate.

 

Liquidity and Capital Resources

The Company is highly leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to meet the future cash requirements described below depends on its ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other conditions, many of which are beyond the Company’s control. Based on current operations and anticipated future growth, the Company believes that its available cash, anticipated cash flow from operations and available borrowings under the senior secured credit facilities will be sufficient to fund working capital, capital expenditure requirements, interest payments and scheduled debt principal payments for at least the next 12 months as of the filing date of this Quarterly Report on Form 10-Q. In order to meet future cash needs the Company may, from time to time, borrow under its existing senior secured credit facilities or issue other long- or short-term debt or equity, if the market and the terms of its existing debt arrangements permit. We will continue to evaluate the best use of our operating cash flow among our capital expenditures, acquisitions and debt reduction.

Overview

The following tables present summarized financial information management believes is helpful in evaluating the Company’s liquidity and capital resources (in thousands):

  

 

 

 

 

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Cash Flows – Operating Activities

Net cash flows provided by operating activities decreased by $85.6 million during the nine months ended September 30, 2017, compared to the same period in 2016. This was primarily attributable to an increase in payments for tax liabilities resulting from sale of stations of $47.4 million, an increase in payments for tax liabilities resulting from the proceeds received to relinquish certain stations’ spectrum of $145.9 million, an increase in cash paid for interest of $106.9 million, use of cash resulting from timing of payments to vendors of $43.9 million and an increase in payments for broadcast rights of $29.1 million. These transactions were partially offset by an increase in net revenue (excluding trade and barter) of $980.0 million less an increase in station and corporate operating expenses (excluding stock compensation and other non-cash station operating expenses) of $696.0 million, and source of cash resulting from timing of accounts receivable collections of $16.6 million.  

Cash paid for interest increased by $106.9 million during the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to interest on new borrowings (net of redemptions) and one-time fees associated with the financing of our acquisitions.

Cash Flows – Investing Activities

Net cash flows used in investing activities increased by $1.909 billion during the nine months ended September 30, 2017 compared to the same period in 2016.

In 2017, we completed our merger with Media General and paid $1.376 billion in cash consideration to stockholders of Media General, less $63.9 million of cash acquired through the merger. In connection with the merger, we also repaid $1.658 billion of Media General’s certain then existing indebtedness as part of the acquisition purchase price. These transactions were partially offset by $481.9 million net proceeds from station divestitures and $478.6 million in gross proceeds to relinquish certain stations’ spectrum. We also received $16.4 million in proceeds from disposal of assets, primarily the sale of a real estate property.

In 2016, we acquired certain assets of four full power stations in four markets in West Virginia and paid $58.5 million. Additionally, we completed the acquisition of five full power stations for total payments of $45.5 million.

Capital expenditures during the nine months ended September 30, 2017 increased by $23.2 million compared to the same period in 2016, primarily due to capital expenditures for acquired stations and entities.

Cash Flows – Financing Activities

Net cash flows provided by financing activities increased by $2.057 billion during the nine months ended September 30, 2017 compared to the same period in 2016.

In 2017, the Company borrowed new term loans, net of debt discount, of $3.531 billion, drew $3.0 million under a new revolving loan and received the gross proceeds from our $900.0 million 5.625% Notes previously deposited in an escrow account. We also received $3.9 million in proceeds from stock option exercises. These cash flow increases were partially offset by repayments of certain then existing term and revolving loans of Nexstar, Mission and Marshall with an aggregate principal of $672.3 million, our redemption of the entire $525.0 million principal amount of our 6.875% Notes at a redemption price equal to 103.438%, repayments of outstanding principal balance under our term loans of $454.4 million associated with the amendments to senior secured credit facilities in July 2017, prepayments of $240.0 million outstanding principal balances under our term loans, payments for debt financing costs associated with new term loans and new revolving credit facilities of $52.0 million, payments to acquire the remaining assets of stations previously owned by WVMH of $66.9 million, purchases of treasury stock of $99.0 million, payments of dividends to our common stockholders of $42.1 million ($0.30 per share each quarter), payments for contingent consideration related to acquisitions of $263.6 million, payments for capital lease obligations of $5.4 million and cash payment for taxes in exchange for shares of Nexstar common stock withheld of $4.0 million.

In 2016, we borrowed a total of $58.0 million under our revolving credit facility to fund our acquisitions. These cash flow increases were partially offset by repayments of outstanding obligations under our revolving credit facility of $58.0 million, scheduled repayments of outstanding principal balance under our, Mission’s and Marshall’s term loans of $15.1 million, payments for debt financing costs of $19.3 million, payments of dividends to our common stockholders of $22.1 million ($0.24 per share each quarter), payments for contingent consideration related to an acquisition of $2.0 million, payments for capital lease obligations of $2.7 million and distribution to a noncontrolling interest of $0.6 million.

Our senior secured credit facility may limit the amount of dividends we may pay to stockholders over the term of the agreement.

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Future Sources of Financing and Debt Service Requirements

As of September 30, 2017, we, Mission, Marshall and Shield had total combined debt of $4.4 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 Company had $172.0 million of total unused revolving loan commitments under its senior secured credit facilities, all of which were available for borrowing, based on the covenant calculations as of September 30, 2017. The Company’s ability to access funds under its senior secured credit facilities depends, in part, on its 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.

In June 2017, our Board of Directors approved an increase in our share repurchase authorization to repurchase up to an additional $100 million of our Class A common stock, of which $6.9 million was utilized in June 2017. During the third quarter of 2017, we repurchased a total of 687,492 shares of our Class A common stock for $40.7 million, funded by cash on hand. As of September 30, 2017, the remaining available amount under the share repurchase authorization was $52.4 million.

On July 21, 2017, the Company received $478.6 million of gross proceeds from the disposition of Media General’s spectrum in the recently concluded FCC auction. On August 28, 2017, we completed the $258.6 million initial payments of the CVR to the holders, which represents the majority of the estimated fair value. In September 2017, we paid the initial taxes due associated with the proceeds from relinquishing Media General’s spectrum of $145.9 million. As of September 30, 2017, the estimated remaining amount of CVR payable to the holders was $13.6 million and the estimated remaining unpaid taxes associated with the proceeds from the spectrum was $29.1 million.

On October 2, 2017, we prepaid $10.0 million of the outstanding principal balance under our Term Loan B, funded by cash on hand.

On October 2, 2017, we completed our acquisition of certain assets of WLWC, a CW affiliated television station in the Providence, Rhode Island market, from OTA Broadcasting (PVD), LLC for $4.1 million in cash, subject to adjustments for working capital, funded by cash on hand.

On October 26, 2017, our Board of Directors declared a quarterly cash dividend of $0.30 per share of its Class A common stock. The dividend is payable on December 1, 2017 to stockholders of record on November 17, 2017.

On November 6, 2017, we prepaid $10.0 million of the outstanding principal balance under our Term Loan B, funded by cash on hand.

The following table summarizes the principal indebtedness scheduled to mature for the periods referenced as of September 30, 2017 (in thousands):

 

 

We make semiannual interest payments on our $275.0 million 6.125% Notes on February 15 and August 15 of each year. We make semiannual interest payments on the 5.625% Notes on February 1 and August 1 of each year. We also make semiannual payments on the 5.875% Notes on May 15 and November 15 of each year. Interest payments on our, Mission’s, Marshall’s and Shield’s senior secured credit facilities are generally paid every one to three months and are payable based on the type of interest rate selected.

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The terms of our, Mission’s, Marshall’s and Shield’s senior secured credit facilities, as well as the indentures governing our 6.125% Notes, 5.625% Notes and the 5.875% Notes, limit, but do not prohibit us, Mission, Marshall or Shield, from incurring substantial amounts of additional debt in the future.

The Company does not have any rating downgrade triggers that would accelerate the maturity dates of its debt. However, a downgrade in the Company’s credit rating could adversely affect its ability to renew the existing credit facilities, obtain access to new credit facilities or otherwise issue debt in the future and could increase the cost of such debt.

Debt Covenants

Our credit agreement contains a covenant which requires us to comply with a maximum consolidated first lien net leverage ratio of 4.50 to 1.00. The financial covenant, which is formally calculated on a quarterly basis, is based on our combined results. The Mission, Marshall and Shield amended credit agreements do not contain financial covenant ratio requirements, but do provide for default in the event we do not comply with all covenants contained in our credit agreement. As of September 30, 2017, we were in compliance with our financial covenant. We believe Nexstar, Mission, Marshall and Shield will be able to maintain compliance with all covenants contained in the credit agreements governing the senior secured facilities and the indentures governing our 6.125% Notes, our 5.625% Notes and our 5.875% Notes for a period of at least the next 12 months from September 30, 2017.

No Off-Balance Sheet Arrangements

As of September 30, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, 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.

Contractual Obligations

The following summarizes the Company’s contractual obligations as of September 30, 2017, and the effect such obligations are expected to have on the Company’s liquidity and cash flow in future periods (in thousands):

 

 

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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, bad debts, broadcast rights, retransmission revenue, trade and barter and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.

Information with respect to the Company’s critical accounting policies which it believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in our Annual Report on Form 10-K for the year ended December 31, 2016. Management believes that as of September 30, 2017, there has been no material change to this information.

 

Upon consummation of the merger on January 17, 2017, Media General’s critical accounting policies were conformed to Nexstar’s critical accounting policies. However, Media General’s historical accounting policy related to pension plans and postretirement benefits has been adopted.

 

Pension plans and postretirement benefits

 

A determination of the liabilities and cost of the Company’s pension and other postretirement plans requires the use of assumptions. The actuarial assumptions used in the Company’s pension and postretirement reporting are reviewed annually with independent actuaries and are compared with external benchmarks, historical trends and the Company’s own experience to determine that its assumptions are reasonable. The key assumptions used in developing the required estimates include discount rates, expected return on plan assets, mortality rates, health care cost trends, retirement rates and expected contributions. The expected rate of return on plan assets is 7.25%.

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.

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. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including: any projections or expectations of earnings, revenue, financial performance, liquidity and capital resources or other financial items; any assumptions or projections about the television broadcasting industry; any statements of our plans, strategies and objectives for our future operations, performance, liquidity and capital resources or other financial items; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and other similar words.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ from a projection or assumption in any of our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties, including those described in our Annual Report on Form 10-K for the year ended December 31, 2016 and in our other filings with the Securities and Exchange Commission. The forward-looking statements made in this Quarterly Report on Form 10-Q are made only as of the date hereof, and we do not have or undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances unless otherwise required by law.

 

 

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Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relates primarily to its long-term debt obligations.

The term loan borrowings at September 30, 2017 under the Company’s senior secured credit facilities bear interest rates ranging from 3.7% to 4.2%, which represented the base rate, or LIBOR, plus the applicable margin, as defined. The revolving loans bear interest at LIBOR plus the applicable margin, which totaled 3.7% at September 30, 2017. Interest is payable in accordance with the credit agreements.

If LIBOR were to increase by 100 basis points, or one percentage point, from its September 30, 2017 level, the Company’s annual interest expense would increase and cash flow from operations would decrease by approximately $28.8 million, based on the outstanding balances of the Company’s senior secured credit facilities as of September 30, 2017. An increase of 50 basis points in LIBOR would result in a $14.4 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 $28.8 million and $14.4 million, respectively. Our 5.625% Notes, 6.125% Notes and 5.875% Notes are fixed rate debt obligations and therefore are not exposed to market interest rate changes. As of September 30, 2017, the Company has no financial instruments in place to hedge against changes in the benchmark interest rates on its senior secured credit facilities.

Impact of Inflation

We believe that the Company’s results of operations are not affected by moderate changes in the inflation rate.

 

Evaluation of Disclosure Controls and Procedures

Nexstar’s management, with the participation of its President and Chief Executive Officer along with its Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report of the effectiveness of the design and operation of Nexstar’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.

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 Securities Exchange Act of 1934, as amended (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 September 30, 2017, 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.

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PART II. OTHER INFORMATION

 

From time to time, the Company is involved in litigation that arises from the ordinary operations of business, such as contractual or employment disputes or other general actions. In the event of an adverse outcome of these proceedings, the Company believes the resulting liabilities would not have a material adverse effect on its financial condition or results of operations.

 

There are no material changes from the risk factors previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

The following is a summary of Nexstar’s common stock repurchases by month for the quarter ended September 30, 2017:

 

 

 

None.

 

None.

 

The unaudited financial statements of Mission Broadcasting, Inc. as of September 30, 2017 and December 31, 2016 and for the three months ended September 30, 2017 and 2016, as filed in Mission Broadcasting, Inc.’s Quarterly Report on Form 10-Q, are incorporated herein by reference.

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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.

 

Dated: November 6, 2017