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Published: 2020-11-06 15:27:01 ET
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     .

Commission File Number: 000-50478

NEXSTAR MEDIA GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

23-3083125

(State of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

545 E. John Carpenter Freeway, Suite 700, Irving, Texas

 

75062

(Address of Principal Executive Offices)

 

(Zip Code)

(972) 373-8800

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock

 

NXST

 

NASDAQ Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer

 

☒

  

Accelerated filer

 

☐

 

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

☐

 

 

 

 

 

 

 

 

 

Emerging growth company

 

☐  

  

 

 

 

 

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

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

As of November 5, 2020, the registrant had 44,045,015 shares of Class A Common Stock outstanding.

 

TABLE OF CONTENTS

 

 

 

  

 

  

Page

PART I

  

FINANCIAL INFORMATION

  

 

 

 

 

 

 

ITEM 1.

  

Financial Statements (Unaudited)

  

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

  

1

 

 

 

 

 

 

  

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019

  

2

 

 

 

 

 

 

  

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019

  

3

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

 

5

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

 

 

 

Note 1:  Organization and Business Operations

6

 

 

Note 2:  Summary of Significant Accounting Policies

6

 

 

Note 3:  Acquisitions and Dispositions

13

 

 

Note 4:  Intangible Assets and Goodwill

19

 

 

Note 5:  Assets Held for Sale

20

 

 

Note 6:  Investments

20

 

 

Note 7:  Accrued Expenses

22

 

 

Note 8:  Retirement and Post Retirement Plans

22

 

 

Note 9:  Debt

23

 

 

Note 10:  Leases

26

 

 

Note 11:  Fair Value Measurements

27

 

 

Note 12:  Common Stock

28

 

 

Note 13:  Income Taxes

28

 

 

Note 14:  FCC Regulatory Matters

29

 

 

Note 15:  Commitments and Contingencies

32

 

 

Note 16:  Segment Data

36

 

 

Note 17:  Subsequent Events

38

 

 

 

 

 

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

39

 

 

 

 

 

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

58

 

 

 

 

 

ITEM 4.

  

Controls and Procedures

  

58

 

 

 

 

 

PART II

  

OTHER INFORMATION

  

 

 

 

 

 

 

ITEM 1.

  

Legal Proceedings

  

59

 

 

 

 

 

ITEM 1A.

  

Risk Factors

  

59

 

 

 

 

 

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

60

 

 

 

 

 

ITEM 3.

  

Defaults Upon Senior Securities

  

60

 

 

 

 

 

ITEM 4.

  

Mine Safety Disclosures

  

60

 

 

 

 

 

ITEM 5.

  

Other Information

  

60

 

 

 

 

 

ITEM 6.

  

Exhibits

  

61

 

 

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share and per share information, unaudited)

 

 

September 30,

 

 

December 31,

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

409,906

 

 

$

232,070

 

Restricted cash and cash equivalents

 

16,610

 

 

 

16,608

 

Accounts receivable, net of allowance for doubtful accounts of $29,082 and $17,205, respectively

 

782,198

 

 

 

883,921

 

Spectrum asset

 

-

 

 

 

67,171

 

Prepaid expenses and other current assets

 

132,498

 

 

 

151,997

 

Total current assets

 

1,341,212

 

 

 

1,351,767

 

Property and equipment, net

 

1,598,081

 

 

 

1,290,428

 

Goodwill

 

2,861,314

 

 

 

2,996,875

 

FCC licenses

 

2,856,374

 

 

 

2,921,465

 

Network affiliation agreements, net

 

2,290,684

 

 

 

2,532,266

 

Other intangible assets, net

 

664,400

 

 

 

727,354

 

Assets held for sale

 

4,524

 

 

 

240,524

 

Investments

 

1,313,858

 

 

 

1,477,353

 

Other noncurrent assets, net

 

360,055

 

 

 

451,705

 

Total assets(1)

$

13,290,502

 

 

$

13,989,737

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of debt

$

22,921

 

 

$

109,310

 

Accounts payable

 

161,083

 

 

 

157,366

 

Broadcast rights payable

 

111,144

 

 

 

120,165

 

Accrued expenses

 

279,816

 

 

 

422,511

 

Liability to surrender spectrum asset

 

-

 

 

 

77,962

 

Operating lease liabilities

 

34,434

 

 

 

35,043

 

Deferred revenue

 

47,498

 

 

 

18,725

 

Other current liabilities

 

14,846

 

 

 

6,475

 

Total current liabilities

 

671,742

 

 

 

947,557

 

Debt

 

7,859,619

 

 

 

8,383,278

 

Deferred tax liabilities

 

1,686,238

 

 

 

1,710,664

 

Other noncurrent liabilities

 

818,187

 

 

 

894,745

 

Total liabilities(1)

 

11,035,786

 

 

 

11,936,244

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock - $0.01 par value, 200,000 shares authorized; none issued and outstanding at each of September 30, 2020 and December 31, 2019

 

-

 

 

 

-

 

Class A Common stock - $0.01 par value, 100,000,000 shares authorized; 47,291,463 shares issued,

44,035,015 shares outstanding as of September 30, 2020 and 47,291,463 shares issued, 45,749,788 shares

  outstanding as of December 31, 2019

 

473

 

 

 

473

 

Class B Common stock - $0.01 par value, 20,000,000 shares authorized; none issued and outstanding

  at each of September 30, 2020 and December 31, 2019

 

-

 

 

 

-

 

Class C Common stock - $0.01 par value, 5,000,000 shares authorized; none issued and outstanding

at each of September 30, 2020 and December 31, 2019

 

-

 

 

 

-

 

Additional paid-in capital

 

1,351,372

 

 

 

1,353,729

 

Accumulated other comprehensive income

 

19,850

 

 

 

19,850

 

Retained earnings

 

1,149,638

 

 

 

778,833

 

Treasury stock - at cost; 3,256,448 and 1,541,675 shares as of September 30, 2020 and December 31, 2019, respectively

 

(286,705

)

 

 

(121,388

)

Total Nexstar Media Group, Inc. stockholders’ equity

 

2,234,628

 

 

 

2,031,497

 

Noncontrolling interests

 

20,088

 

 

 

21,996

 

Total stockholders’ equity

 

2,254,716

 

 

 

2,053,493

 

Total liabilities and stockholders’ equity

$

13,290,502

 

 

$

13,989,737

 

 

 

 

 

 

 

 

 

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

 

(1)

The consolidated total assets as of September 30, 2020 and December 31, 2019 include certain assets held by consolidated VIEs of $339.6 million and $332.6 million, respectively, which are not available to be used to settle the obligations of Nexstar. The consolidated total liabilities as of September 30, 2020 and December 31, 2019 include certain liabilities of consolidated VIEs of $59.8 million and $61.7 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of Nexstar. See Note 2 for additional information.

1

NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share information, unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

$

1,118,203

 

 

$

663,575

 

 

$

3,124,658

 

 

$

1,939,234

 

Operating expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct operating expenses, excluding depreciation and amortization

 

 

423,091

 

 

 

322,327

 

 

 

1,284,789

 

 

 

911,234

 

Selling, general and administrative expenses, excluding depreciation and amortization

 

 

226,544

 

 

 

183,083

 

 

 

638,171

 

 

 

469,501

 

Amortization of broadcast rights

 

 

31,968

 

 

 

18,452

 

 

 

104,916

 

 

 

46,749

 

Amortization of intangible assets

 

 

69,265

 

 

 

42,443

 

 

 

209,360

 

 

 

115,538

 

Depreciation

 

 

36,611

 

 

 

29,363

 

 

 

107,787

 

 

 

84,890

 

Reimbursement from the FCC related to station repack

 

 

(12,873

)

 

 

(20,417

)

 

 

(51,347

)

 

 

(54,020

)

Goodwill and intangible assets impairment

 

 

-

 

 

 

63,317

 

 

 

-

 

 

 

63,317

 

Gain on disposal of stations and entities, net

 

 

-

 

 

 

(96,608

)

 

 

(7,025

)

 

 

(96,608

)

Change in the estimated fair value of contingent consideration attributable to a merger

 

 

-

 

 

 

-

 

 

 

3,933

 

 

 

-

 

Gain on relinquishment of spectrum

 

 

-

 

 

 

-

 

 

 

(10,791

)

 

 

-

 

Total operating expenses

 

 

774,606

 

 

 

541,960

 

 

 

2,279,793

 

 

 

1,540,601

 

Income from operations

 

 

343,597

 

 

 

121,615

 

 

 

844,865

 

 

 

398,633

 

Income on equity investments, net

 

 

15,861

 

 

 

3,217

 

 

 

41,351

 

 

 

2,061

 

Interest expense, net

 

 

(77,265

)

 

 

(93,199

)

 

 

(260,800

)

 

 

(197,519

)

Loss on extinguishment of debt

 

 

(37,371

)

 

 

-

 

 

 

(44,848

)

 

 

(3,724

)

Pension and other postretirement plans credit, net

 

 

10,761

 

 

 

2,578

 

 

 

32,285

 

 

 

5,378

 

Other (expenses) income, net

 

 

(1,093

)

 

 

118

 

 

 

(778

)

 

 

209

 

Income before income taxes

 

 

254,490

 

 

 

34,329

 

 

 

612,075

 

 

 

205,038

 

Income tax expense

 

 

(65,177

)

 

 

(39,507

)

 

 

(166,927

)

 

 

(82,594

)

Net income (loss)

 

 

189,313

 

 

 

(5,178

)

 

 

445,148

 

 

 

122,444

 

Net loss (income) attributable to noncontrolling interests

 

 

1,371

 

 

 

(669

)

 

 

2,046

 

 

 

(5,397

)

Net income (loss) attributable to Nexstar Media Group, Inc.

 

$

190,684

 

 

$

(5,847

)

 

$

447,194

 

 

$

117,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share attributable to Nexstar Media Group, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.24

 

 

$

(0.13

)

 

$

9.87

 

 

$

2.54

 

Diluted

 

$

4.08

 

 

$

(0.13

)

 

$

9.50

 

 

$

2.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,979

 

 

 

46,114

 

 

 

45,313

 

 

 

45,997

 

Diluted

 

 

46,737

 

 

 

46,114

 

 

 

47,064

 

 

 

47,919

 

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

 

 

2

NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended September 30, 2020 and 2019

(in thousands, except for share and per share information, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

 

 

Paid-In

 

 

 

 

Retained

 

 

 

 

Comprehensive

 

 

 

 

Treasury Stock

 

 

 

 

Noncontrolling

 

 

Stockholders’

 

 

 

Shares

 

 

 

 

Amount

 

 

 

 

Capital

 

 

 

 

Earnings

 

 

 

 

Income (Loss)

 

 

 

 

Shares

 

 

 

 

Amount

 

 

 

 

interests

 

 

Equity

 

Balances as of June 30, 2020

 

 

47,291,463

 

 

 

 

$

473

 

 

 

 

$

1,340,526

 

 

 

 

$

984,316

 

 

 

 

$

19,850

 

 

 

 

 

(2,004,823

)

 

 

 

$

(164,847

)

 

 

 

$

21,459

 

 

$

2,201,777

 

Purchase of treasury stock

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(1,300,000

)

 

 

 

 

(125,013

)

 

 

 

 

-

 

 

 

(125,013

)

Stock-based compensation expense

 

 

-

 

 

 

 

 

-

 

 

 

 

 

12,483

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

12,483

 

Vesting of restricted stock units and

  exercise of stock options

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(1,637

)

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

48,375

 

 

 

 

 

3,155

 

 

 

 

 

-

 

 

 

1,518

 

Dividends declared on common stock ($0.56 per share)

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(25,362

)

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

(25,362

)

Net income (loss)

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

190,684

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(1,371

)

 

 

189,313

 

Balances as of September 30, 2020

 

 

47,291,463

 

 

 

 

$

473

 

 

 

 

$

1,351,372

 

 

 

 

$

1,149,638

 

 

 

 

$

19,850

 

 

 

 

 

(3,256,448

)

 

 

 

$

(286,705

)

 

 

 

$

20,088

 

 

$

2,254,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of June 30, 2019

 

 

47,291,463

 

 

 

 

$

473

 

 

 

 

$

1,337,057

 

 

 

 

$

701,946

 

 

 

 

$

(14,316

)

 

 

 

 

(1,188,353

)

 

 

 

$

(81,381

)

 

 

 

$

14,438

 

 

$

1,958,217

 

Stock-based compensation expense

 

 

-

 

 

 

 

 

-

 

 

 

 

 

11,270

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

11,270

 

Vesting of restricted stock units and exercise of stock options

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(1,816

)

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

35,675

 

 

 

 

 

2,082

 

 

 

 

 

-

 

 

 

266

 

Dividends declared on common stock ($0.45 per share)

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(20,743

)

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

(20,743

)

Noncontrolling interest from a business combination

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

6,201

 

 

 

6,201

 

Net income (loss)

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(5,847

)

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

669

 

 

 

(5,178

)

Balances as of September 30, 2019

 

 

47,291,463

 

 

 

 

$

473

 

 

 

 

$

1,346,511

 

 

 

 

$

675,356

 

 

 

 

$

(14,316

)

 

 

 

 

(1,152,678

)

 

 

 

$

(79,299

)

 

 

 

$

21,308

 

 

$

1,950,033

 

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

 

3

NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2020 and 2019

(in thousands, except for share and per share information, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Noncontrolling

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Shares

 

 

Amount

 

 

interests

 

 

Equity

 

Balances as of December 31, 2019

 

 

47,291,463

 

 

$

473

 

 

$

1,353,729

 

 

$

778,833

 

 

$

19,850

 

 

 

(1,541,675

)

 

$

(121,388

)

 

$

21,996

 

 

$

2,053,493

 

Purchase of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,250,000

)

 

 

(197,600

)

 

 

-

 

 

 

(197,600

)

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

35,917

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

35,917

 

Vesting of restricted stock units and

  exercise of stock options

 

 

-

 

 

 

-

 

 

 

(36,893

)

 

 

-

 

 

 

-

 

 

 

535,227

 

 

 

32,283

 

 

 

-

 

 

 

(4,610

)

Dividends declared on common stock ($1.68 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(76,380

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(76,380

)

Contribution from a noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

138

 

 

 

138

 

Disposal of an entity

 

 

-

 

 

 

-

 

 

 

(1,381

)

 

 

(9

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,390

)

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

447,194

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,046

)

 

 

445,148

 

Balances as of September 30, 2020

 

 

47,291,463

 

 

$

473

 

 

$

1,351,372

 

 

$

1,149,638

 

 

$

19,850

 

 

 

(3,256,448

)

 

$

(286,705

)

 

$

20,088

 

 

$

2,254,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2018

 

 

47,291,463

 

 

$

473

 

 

$

1,351,931

 

 

$

620,371

 

 

$

(14,316

)

 

 

(1,665,217

)

 

$

(105,685

)

 

$

16,210

 

 

$

1,868,984

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

29,030

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

29,030

 

Vesting of restricted stock units and

  exercise of stock options

 

 

-

 

 

 

-

 

 

 

(34,450

)

 

 

-

 

 

 

-

 

 

 

512,539

 

 

 

26,386

 

 

 

-

 

 

 

(8,064

)

Dividends declared on common stock ($1.35 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(62,062

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(62,062

)

Purchase of noncontrolling interest from a consolidated variable interest entity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,500

)

 

 

(6,500

)

Noncontrolling interest from a business combination

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,201

 

 

 

6,201

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

117,047

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,397

 

 

 

122,444

 

Balances as of September 30, 2019

 

 

47,291,463

 

 

$

473

 

 

$

1,346,511

 

 

$

675,356

 

 

$

(14,316

)

 

 

(1,152,678

)

 

$

(79,299

)

 

$

21,308

 

 

$

1,950,033

 

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

4

NEXSTAR MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

445,148

 

 

$

122,444

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

209,360

 

 

 

115,538

 

Amortization of broadcast rights

 

 

104,916

 

 

 

46,749

 

Depreciation of property and equipment

 

 

107,787

 

 

 

84,890

 

Goodwill and intangible assets impairment

 

 

-

 

 

 

63,317

 

Stock-based compensation expense

 

 

35,917

 

 

 

29,030

 

Provision for bad debt

 

 

24,735

 

 

 

8,119

 

Amortization of debt financing costs, debt discounts and premium

 

 

13,316

 

 

 

6,592

 

Loss on extinguishment of debt

 

 

44,848

 

 

 

3,724

 

Gain on asset disposal, net

 

 

(770

)

 

 

(229

)

Deferred income taxes

 

 

(20,940

)

 

 

(14,899

)

Gain on relinquishment of spectrum

 

 

(10,791

)

 

 

-

 

Gain on disposal of stations and entities, net

 

 

(7,025

)

 

 

(96,608

)

Change in the estimated fair value of contingent consideration attributable to a merger

 

 

3,933

 

 

 

-

 

Spectrum repack reimbursements

 

 

(51,347

)

 

 

(54,020

)

Payments for broadcast rights

 

 

(147,214

)

 

 

(47,150

)

Income on equity investments, net

 

 

(41,351

)

 

 

(2,061

)

Distribution from equity investments - return on capital

 

 

206,997

 

 

 

-

 

Other operating activities, net

 

 

(1,787

)

 

 

(1,234

)

Changes in operating assets and liabilities, net of acquisitions and dispositions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

93,368

 

 

 

54,633

 

Prepaid expenses and other current assets

 

 

10,000

 

 

 

1,827

 

Other noncurrent assets

 

 

11,827

 

 

 

(1,580

)

Accounts payable

 

 

(95

)

 

 

26

 

Accrued expenses and other current liabilities

 

 

(97,587

)

 

 

(26,578

)

Income tax payable

 

 

(15,021

)

 

 

28,822

 

Other noncurrent liabilities

 

 

(40,736

)

 

 

(5,370

)

Net cash provided by operating activities

 

 

877,488

 

 

 

315,982

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(170,150

)

 

 

(110,225

)

Payments for acquisitions, net of cash acquired

 

 

(132,284

)

 

 

(5,881,179

)

Proceeds from sale of stations and entities

 

 

362,803

 

 

 

1,352,958

 

Proceeds from resolution of acquired contingency

 

 

98,000

 

 

 

-

 

Spectrum repack reimbursements from the FCC

 

 

51,347

 

 

 

54,020

 

Collection of investment in a loan receivable

 

 

49,014

 

 

 

-

 

Proceeds from disposals of property and equipment

 

 

1,029

 

 

 

2,026

 

Other investing activities, net

 

 

603

 

 

 

247

 

Net cash provided by (used in) investing activities

 

 

260,362

 

 

 

(4,582,153

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from long-term debt, net of debt discounts

 

 

1,225,000

 

 

 

4,831,050

 

Repayments of long-term debt

 

 

(1,857,838

)

 

 

(215,413

)

Premium paid on debt extinguishment

 

 

(25,317

)

 

 

-

 

Payments for debt financing costs

 

 

(10,741

)

 

 

(70,717

)

Purchase of treasury stock

 

 

(197,600

)

 

 

-

 

Common stock dividends paid

 

 

(76,380

)

 

 

(62,062

)

Payments for finance lease and capitalized software obligations

 

 

(12,664

)

 

 

(6,419

)

Cash paid for shares withheld for taxes

 

 

(6,784

)

 

 

(9,813

)

Proceeds from exercise of stock options

 

 

2,174

 

 

 

1,749

 

Contribution from a noncontrolling interest

 

 

138

 

 

 

-

 

Purchase of noncontrolling interests

 

 

-

 

 

 

(6,393

)

Other financing activities, net

 

 

-

 

 

 

(6,897

)

Net cash provided by (used in) financing activities

 

 

(960,012

)

 

 

4,455,085

 

Net increase in cash, cash equivalents and restricted cash

 

 

177,838

 

 

 

188,914

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

248,678

 

 

 

145,115

 

Cash, cash equivalents and restricted cash at end of period

 

$

426,516

 

 

$

334,029

 

Supplemental information:

 

 

 

 

 

 

 

 

Interest paid

 

$

290,250

 

 

$

178,882

 

Income taxes paid, net of refunds

 

$

201,979

 

 

$

68,627

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

14,186

 

 

$

27,683

 

Noncash purchases of property and equipment

 

$

20,342

 

 

$

-

 

Right-of-use assets obtained in exchange for operating lease obligations(1)

 

$

22,886

 

 

$

115,579

 

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

 

 

(1)

Amounts for the nine months ended September 30, 2019 include the transition adjustment of $112.8 million for the adoption of ASC 842.

 

 

5

NEXSTAR MEDIA GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1:  Organization and Business Operations

Nexstar Media Group, Inc., a Delaware corporation, together with its wholly owned subsidiaries (“Nexstar”, “we”, “our, “ours”, and “us”), is a television broadcasting and digital media company focused on the acquisition, development and operation of television stations, interactive community websites and digital media services. As of September 30, 2020, we owned, operated, programmed or provided sales and other services to 197 full power television stations, including those owned by consolidated variable interest entities (“VIEs”), and one AM radio station in 115 markets in 39 states and the District of Columbia. The stations are affiliates of ABC, NBC, FOX, CBS, The CW, MNTV, and other broadcast television networks. As of September 30, 2020, the stations reached approximately 39% of all U.S. television households (applying the Federal Communications Commission’s (“FCC”) ultra-high frequency (“UHF”) discount). Through various local service agreements, we provide sales, programming, and other services to 36 full power television stations owned by independent third parties. Nexstar also owns WGN America, a national general entertainment cable network, a 31.3% ownership stake in Television Food Network, G.P. (“TV Food Network”) and a portfolio of real estate assets.

 

Note 2:  Summary of Significant Accounting Policies

Principles of Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of Nexstar and the accounts of independently-owned VIEs for which we are 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’s stockholders’ equity. All intercompany account balances and transactions have been eliminated in consolidation. Nexstar management evaluates each arrangement that may include variable interests and determines the need to consolidate an entity where it determines Nexstar is the primary beneficiary of a VIE in accordance with related authoritative literature and interpretive guidance.

 

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

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Current assets

 

$

9,735

 

 

$

9,837

 

Property and equipment, net

 

 

19,776

 

 

 

19,586

 

Goodwill

 

 

102,447

 

 

 

102,447

 

FCC licenses

 

 

151,782

 

 

 

138,482

 

Network affiliation agreements, net

 

 

51,767

 

 

 

55,378

 

Other intangible assets, net

 

 

-

 

 

 

22

 

Other noncurrent assets, net

 

 

4,106

 

 

 

6,818

 

Total assets

 

$

339,613

 

 

$

332,570

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

19,819

 

 

$

19,653

 

Noncurrent liabilities

 

 

40,010

 

 

 

42,012

 

Total liabilities

 

$

59,829

 

 

$

61,665

 

 

 


6

Liquidity

 

The Company is leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to repay or refinance its debt will depend on, among other things, financial, business, market, competitive and other conditions, many of which are beyond the Company’s control, for instance, uncertainties surrounding the business outlook caused by Coronavirus Disease 2019 (“COVID-19”). In December 2019, COVID-19 was reported and has spread globally, including to every state in the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic and the United States government declared a national emergency with respect to COVID-19. COVID-19 has created and may continue to create significant uncertainty in global financial markets, which may reduce demand for the Company’s advertising, retransmission, and digital services, impact the productivity of its workforce, reduce its access to capital, and harm its business and results of operations.

 

The ongoing effect of the COVID-19 pandemic had an adverse impact on the Company’s financial results mostly in the first part of the second quarter in 2020. This was followed by a significant improvement in the Company’s financial results in the remaining part of second quarter and in the third quarter of 2020 as certain areas throughout the United States permitted the re-opening of non-essential businesses which has had a favorable impact to the macroeconomic environment and to the Company’s revenue. As of September 30, 2020, the Company remained profitable. Its current year results were also higher than prior year results primarily due to contributions from the acquisition of Tribune Media Company (“Tribune”) in September 2019 and revenue from political advertising in 2020. Overall, the disruptions from COVID-19 did not have a material impact on the Company’s liquidity. As of September 30, 2020, the Company’s unrestricted cash on hand amounted to $409.9 million and the Company had a positive working capital of $669.5 million, both increased from the December 31, 2019 levels of $232.1 million and $404.2 million, respectively. As of September 30, 2020, the Company was in compliance with its financial covenants contained in the amended credit agreements governing its senior secured credit facilities. The Company believes it has sufficient unrestricted cash on hand and has availability to access additional cash up to $172.7 million and $25.0 million under the respective amended Nexstar and Mission revolving credit facilities (with a maturity date of October 2023) to meet its business operating requirements, its capital expenditures and to continue to service its debt for at least the next 12 months as of the filing date of this Quarterly Report on Form 10-Q. The Company also believes its leverage is well positioned to withstand the current challenges as the nearest maturity of its outstanding debt will not occur until October 2023.

 

Interim Financial Statements

 

The Condensed Consolidated Financial Statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 are unaudited. However, in the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Results of operations for interim periods are not necessarily indicative of results for the full year. Estimates are used for, but are not limited to, allowance for doubtful accounts, valuation of assets acquired and liabilities assumed in business combinations, distribution revenue recognized, income taxes, the recoverability of goodwill, FCC licenses and long-lived assets, the recoverability of investments, the recoverability of broadcast rights and the useful lives of property and equipment and intangible assets. As of September 30, 2020, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or to revise the carrying value of its assets or liabilities. However, these estimates and judgments may change as new events occur and additional information is obtained, which may result in changes being recognized in the Company’s consolidated financial statements in future periods. While the Company considered the effects of COVID-19 in its estimates and assumptions, due to the current level of uncertainty over the economic and operational impacts of COVID-19 on its business, there may be other judgments and assumptions that were not currently considered. Such judgments and assumptions could result in a meaningful impact on the Company’s consolidated financial statements in future periods. Actual results could differ from those estimates and any such differences may have a material impact on the Company’s condensed consolidated financial statements.

 

These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in Nexstar’s Annual Report on Form 10-K for the year ended December 31, 2019. The balance sheet as of December 31, 2019 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 


7

Variable Interest Entities

 

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

 

Consolidated VIEs

 

Nexstar consolidates entities in which it is deemed under U.S. GAAP to have controlling financial interests for financial reporting purposes as a result of (1) local service agreements Nexstar has with the stations owned by these entities, (2) Nexstar’s guarantees of the obligations incurred under certain VIEs’ senior secured credit facilities (see Note 9), (3) Nexstar having power over significant activities affecting these VIEs’ economic performance, including budgeting for advertising revenue, certain advertising sales and, in some cases, hiring and firing of sales force personnel and (4) purchase options granted by each such VIE which permit Nexstar to acquire the assets and assume the liabilities of these VIEs’ stations (except for Mission stations in three markets), subject to FCC consent.

 

The following table summarizes the various local service agreements Nexstar had in effect as of September 30, 2020 with its consolidated VIEs:

 

Service Agreements

 

Owner

 

Full Power Stations

TBA Only

 

Mission Broadcasting, Inc. ("Mission")

 

WFXP, KHMT and KFQX

LMA Only

 

WNAC, LLC

 

WNAC

 

 

54 Broadcasting, Inc. (“54 Broadcasting”)

 

KNVA

SSA & JSA

 

Mission

 

KJTL, KLRT, KASN, KOLR, KCIT, KAMC, KRBC, KSAN, WUTR, WAWV, WYOU, KODE, WTVO, KTVE, WTVW and WVNY

 

 

White Knight Broadcasting (“White Knight”)

 

WVLA, KFXK, KSHV

 

 

Shield Media, LLC (“Shield”)

 

WXXA and WLAJ

 

 

Vaughan Media, LLC (“Vaughan”)

 

WBDT, WYTV and KTKA

SSA Only

 

Tamer Media, LLC (“Tamer”)

 

KWBQ, KASY and KRWB

 

 

Mission

 

KMSS, KPEJ, KLJB

 

Nexstar’s ability to receive cash from its VIEs is governed by the local service agreements. Under these agreements, Nexstar has received substantially all of the consolidated VIEs’ available cash, after satisfaction of operating costs and debt obligations. Nexstar anticipates it will continue to receive substantially all of the consolidated VIEs’ available cash, after satisfaction of operating costs and debt obligations. In compliance with FCC regulations for all the parties, each VIE maintains complete responsibility for and control over programming, finances, personnel and operations of its stations.

 

8

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

 

 

September 30, 2020

 

 

December 31, 2019

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,153

 

 

$

12,944

 

Accounts receivable, net

 

 

19,655

 

 

 

17,995

 

Prepaid expenses and other current assets

 

 

2,541

 

 

 

1,921

 

Total current assets

 

 

31,349

 

 

 

32,860

 

Property and equipment, net

 

 

47,360

 

 

 

42,308

 

Goodwill

 

 

138,936

 

 

 

135,634

 

FCC licenses

 

 

151,782

 

 

 

138,482

 

Network affiliation agreements, net

 

 

91,118

 

 

 

66,679

 

Other intangible assets, net

 

 

1,250

 

 

 

513

 

Other noncurrent assets, net

 

 

12,412

 

 

 

12,749

 

Total assets

 

$

474,207

 

 

$

429,225

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt

 

$

1,492

 

 

$

3,433

 

Interest payable

 

 

454

 

 

 

834

 

Other current liabilities

 

 

19,819

 

 

 

19,653

 

Total current liabilities

 

 

21,765

 

 

 

23,920

 

Debt

 

 

244,259

 

 

 

241,190

 

Deferred tax liabilities

 

 

22,512

 

 

 

22,505

 

Other noncurrent liabilities

 

 

17,498

 

 

 

19,507

 

Total liabilities

 

$

306,034

 

 

$

307,122

 

 

On December 1, 2014, Nexstar met the accounting criteria for a controlling financial interest in Marshall Broadcasting Group, Inc. (“Marshall”) as a result of (i) local service agreements (JSAs and SSAs) Nexstar had with the three television stations previously owned by Marshall, (ii) Nexstar’s previous guarantee of the obligations incurred under Marshall’s previous senior secured credit facility, and (iii) Nexstar’s previous power over activities affecting Marshall’s significant economic performance, including management advice and consultation on broadcast matters, the ability to sell certain advertising on the Marshall stations, and the production of the Marshall stations’ news and other programming.  Thus, Nexstar consolidated Marshall and its stations beginning on December 1, 2014. In December 2019, Marshall filed a voluntary petition for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas. Effective on December 6, 2019, the bankruptcy court ordered the cancellation of certain executory contracts between Nexstar and Marshall, including the JSAs.

 

As a result of Marshall’s filing for bankruptcy protection and the cancellation of the JSAs, Nexstar determined that it no longer had the power to direct the most significant economic activities of the entity and thus no longer met the accounting criteria for a controlling financial interest in Marshall due to the bankruptcy court taking control of Marshall’s significant financial affairs.  Therefore, in accordance with the applicable accounting standards, Nexstar deconsolidated Marshall’s assets, liabilities and equity effective in December 2019. Accordingly, the operating results and cash flows of Marshall for the three and nine months ended September 30, 2020 were excluded and the operating results and cash flows of Marshall for the three and nine months ended September 30, 2019 were included in the accompanying Condensed Consolidated Statements of Operations and Consolidated Statements of Cash Flows. The assets, liabilities and equity of Marshall as of September 30, 2020 and December 31, 2019 were excluded in the accompanying Condensed Consolidated Balance Sheets.

 

On March 30, 2020, Mission entered into an asset purchase agreement to acquire certain assets of the three television stations previously owned by Marshall: KMSS serving the Shreveport, Louisiana market, KPEJ serving the Odessa, Texas market and KLJB serving the Quad Cities, Iowa/Illinois market. On April 1, 2020, the acquisition was approved by the Bankruptcy Court for the Southern District of Texas. On September 1, 2020, Mission completed this acquisition. The purchase price for the acquisition was $53.2 million, of which $49.0 million was applied against Mission’s existing loans receivable from Marshall on a dollar-for-dollar basis and the remaining $4.2 million in cash was funded by cash on hand (See Note 3 for additional information). Upon closing of the acquisition, the SSAs between Nexstar and Marshall and the debt agreement between Mission and Marshall were terminated, thus, Nexstar no longer holds a variable interest in Marshall. On September 1, 2020, Mission entered into new SSAs with Nexstar.

 

 


9

As a result of Mission’s acquisition of the former Marshall stations, Nexstar determined that it has variable interests in these stations as a result of the new SSAs effective September 1, 2020 and Nexstar’s guarantee of the obligations incurred under Mission’s senior secured credit facility. Nexstar has also evaluated its arrangements with these stations and with Mission and determined that it is the primary beneficiary of the variable interests because Nexstar has the ultimate power to direct the activities that most significantly impact the economic performance of the stations including developing the annual operating budget, management advice and consultation on broadcast matters and the production of news and other programming. Therefore, Nexstar has consolidated these stations under authoritative guidance related to the consolidation of variable interest entities beginning on September 1, 2020.

 

Non-Consolidated VIEs

 

Nexstar has an outsourcing agreement with Cunningham Broadcasting Corporation (“Cunningham”), which continues through December 31, 2021. Under the outsourcing agreement, Nexstar provides certain engineering, production, sales and administrative services for WYZZ, the FOX affiliate in the Peoria, Illinois market, through WMBD, the Nexstar television station in that market. During the term of the outsourcing agreement, Nexstar retains the broadcasting revenue and related expenses of WYZZ and is obligated to pay a monthly fee to Cunningham based on the combined operating cash flow of WMBD and WYZZ, as defined in the agreement.

 

Nexstar has determined that it has a variable interest in WYZZ. Nexstar has evaluated its arrangements with Cunningham and has determined that it is not the primary beneficiary of the variable interest in this station because it does not have the ultimate power to direct the activities that most significantly impact the station’s economic performance, including developing the annual operating budget, programming and oversight and control of sales management personnel. Therefore, Nexstar has not consolidated WYZZ under authoritative guidance related to the consolidation of VIEs. Under the outsourcing 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.

Income Per Share

Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed using the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares are calculated using the treasury stock method. They consist of stock options and restricted stock units outstanding during the period and reflect the potential dilution that could occur if common shares were issued upon exercise of stock options and vesting of restricted stock units. The following table shows the amounts used in computing Nexstar’s diluted shares (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Weighted average shares outstanding - basic

 

 

44,979

 

 

 

46,114

 

 

 

45,313

 

 

 

45,997

 

Dilutive effect of equity incentive plan instruments

 

 

1,758

 

 

 

-

 

 

 

1,751

 

 

 

1,922

 

Weighted average shares outstanding - diluted

 

 

46,737

 

 

 

46,114

 

 

 

47,064

 

 

 

47,919

 

 

During the three months ended September 30, 2020 and 2019, stock options and restricted stock units to acquire a weighted average of 85,000 and 2,700 shares of Class A common stock, respectively, were excluded from the computation of diluted earnings per share because their impact would have been anti-dilutive.

 

During the nine months ended September 30, 2020 and 2019, stock options and restricted stock units to acquire a weighted average of 157,000 shares and 10,900 shares of Class A common stock, respectively, were excluded from the computation of diluted earnings per share because their impact would have been anti-dilutive.

10

Basis of Presentation

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

 

Recent Accounting Pronouncements

 

New Accounting Standards Adopted

 

In April 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which provided certain improvements to ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” As the Company has adopted ASU 2016-01 and ASU 2017-12, the improvements in ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, and the interim periods within those fiscal years. The Company adopted this guidance concurrent with its adoption of ASU 2016-13 effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures and no cumulative-effect adjustment was required.

 

In March 2019, the FASB issued ASU 2019-02, “Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350).” The standard requires production costs of episodic television series to be capitalized as incurred, which aligns the guidance with the accounting for production costs of films. The guidance also provides that capitalized costs associated with films and license agreements will be tested for impairment based on the lower of unamortized cost or fair value, as opposed to the existing guidance where the impairment test is based on estimated net realizable value, and also includes additional disclosure requirements. The standard should be applied prospectively. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.

 

In October 2018, the FASB issued ASU 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities.” The standard provides guidance for determining whether a decision-making fee is a variable interest and requires reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP). The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820),” which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.

 

In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20),” which removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The standards are effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The updated standard should be applied on a retrospective basis. The Company early adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires measurement and recognition of expected credit losses for financial assets held. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosure and no cumulative-effect adjustment was required.

 

11

In connection with the Company’s estimate of allowance for doubtful accounts, due to the expected loss from future payments as a result of economic uncertainty arising from (i) the negative effects which the COVID-19 pandemic has had on the United States economy and financial markets, and (ii) other economic factors, the Company increased the allowance for doubtful accounts on its accounts receivable to $29.1 million as of September 30, 2020. In the third quarter of 2020, Nexstar also recorded a $13.1 million allowance for uncollectible amounts due from Marshall (in other noncurrent assets), an entity for which Nexstar had a variable interest (See Note 2, “Variable Interest Entities”). During the three and nine months ended September 30, 2020, the Company recorded bad debt expense of $14.4 million and $24.7 million, respectively, including the provision for amounts due from Marshall in the third quarter of 2020.

 

New Accounting Standards Not Yet Adopted

 

On August 26, 2020, as part of its broader disclosure effectiveness initiative, the SEC issued Final Rule Release No. 33-10825, “Modernization of Regulation S-K Items 101, 103, and 105” (“SEC Rule 33-10825”), which amends the disclosure rules relating to the description of the business, legal proceedings, and risk factors which are required in many SEC filings, including Form 10-K and registration statements. Key changes include: (i) requiring a principles-based description of the company’s human capital resources, including any human capital measures/objectives that the company focuses on in managing its business (e.g., those that address the development, attraction, and retention of personnel) when material to understanding the business; (ii) eliminating the requirement to disclose business developments over the last five years and focusing on developments that are critical to understanding the company’s business, and, after an initial registration statement, permitting companies to provide only an update of material business developments, so long as the full discussion of business developments from a single previously-filed registration statement or report is incorporated by reference; (iii) increasing the quantitative threshold for disclosing certain governmental environmental proceedings and allowing legal proceedings disclosures to be hyperlinked or cross-referenced to other sections in the document; and (iv) shifting the focus to “material” risk factors categorized by relevant heading and requiring a risk factor summary when the risk factor section is longer than 15 pages. SEC Rule 33-10825 is effective on November 9, 2020. The Company is currently assessing the potential impacts of the adoption of SEC Rule 33-10825 may have on its Condensed Consolidated Financial Statements upon its adoption.

 

On May 21, 2020, the SEC issued Final Rule Release No. 33-10786, “Amendments to Financial Disclosures about Acquired and Disposed Businesses” (“SEC Rule 33-10786”), which amends the disclosure requirements applicable to acquisitions and dispositions of businesses to improve the financial information provided to investors, facilitate more timely access to capital, and reduce the complexity and costs to prepare disclosure. SEC Rule 33-10786, among other things, (i) amends the tests used to determine significance and expand the use of proforma financial information; (ii) revises the proforma information requirements; (iii) reduces the maximum number of years for which financial statements under Regulation S-X are required to two years; (iv) permit abbreviated financial statements for certain acquisitions; (v) modifies the disclosure requirements relating to the aggregate effect of acquisitions for which financial statements are not required; and (vi) conforms the significance threshold and tests on both disposed and acquired businesses. The amendments are effective January 1, 2021, but early compliance is permitted. The Company does not expect the standard to have a material impact on its Condensed Consolidated Financial Statements upon its adoption effective January 1, 2021.

 

In March 2020, FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective through December 31, 2022. The Company is currently assessing the potential impacts the adoption of ASU 2020-04 may have on its Condensed Consolidated Financial Statements upon its adoption.

 

In January 2020, FASB issued ASU 2020-01, “Investments—Equity securities (Topic 321)” (“ASU 2020-01”), which clarifies the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments in ASU 2020-01 clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments in ASU 2020-01 are effective for all entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the standard to have a material impact on its Condensed Consolidated Financial Statements upon its adoption effective January 1, 2021.

 

In December 2019, the FASB issued ASU 2019-12, “Income taxes (Topic 740)—Simplifying the accounting for income taxes” (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020 (January 1, 2021 for the Company). Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2019-12 will have on its Condensed Consolidated Financial Statements upon its adoption effective January 1, 2021.

12

Note 3:  Acquisitions and Dispositions

 

2020 Acquisitions

 

On January 27, 2020, Nexstar and Sinclair Broadcast Group, Inc. (“Sinclair”) resolved the outstanding lawsuit between Tribune and Sinclair. Tribune was acquired by Nexstar on September 19, 2019. As part of the resolution, Nexstar acquired from Sinclair certain non-license assets associated with television station KGBT-TV and the assets of television station WDKY, as further discussed below. For additional information with respect to the litigation between Tribune and Sinclair and its resolution, see Note 15, “Commitment and Contingencies,” “Termination of Tribune and Sinclair Merger Agreement.”

 

On January 27, 2020, Nexstar acquired from Sinclair certain non-license assets associated with television station KGBT-TV in the Harlingen-Weslaco-Brownsville-McAllen, Texas market for $17.9 million in cash funded by cash on hand.

 

On March 2, 2020, Nexstar completed the acquisition of Fox affiliate television station WJZY and MyNetworkTV affiliate television station WMYT in the Charlotte, NC market from Fox Television Stations, LLC (“Fox”), a Delaware limited liability company, for $45.3 million in cash. This acquisition allowed Nexstar’s entrance into this market. Simultaneous with this acquisition, Nexstar sold certain of its television stations to Fox as described in more detail in “2020 Dispositions” below.

 

On March 30, 2020, Mission, a VIE consolidated by Nexstar, entered into an asset purchase agreement to acquire certain assets of the three television stations formerly owned by Marshall: KMSS serving the Shreveport, Louisiana market, KPEJ serving the Odessa, Texas market and KLJB serving the Quad Cities, Iowa/Illinois market. On April 1, 2020, the acquisition was approved by the Bankruptcy Court for the Southern District of Texas. On September 1, 2020, Mission completed this acquisition which allowed it entrance into these markets. The purchase price for the acquisition was $53.2 million, of which $49.0 million was applied against Mission’s existing loans receivable from Marshall on a dollar-for-dollar basis and the remaining $4.2 million in cash was funded by cash on hand. On September 1, 2020, Mission also entered into new SSAs with Nexstar.

 

On September 17, 2020, Nexstar completed the acquisition of WDKY-TV, the Fox affiliate in the Lexington, KY market, from Sinclair for $18.0 million in cash, funded by cash on hand. This acquisition allowed Nexstar entrance into this market. Based on the preliminary purchase price allocation, the provisional fair values of identifiable net assets acquired were $37.0 million which led to a bargain purchase gain of $19.0 million. The bargain purchase gain was recognized as a result of Sinclair’s motivation to sell the station to Nexstar as part of a resolution to settle the existing lawsuit between Tribune and Sinclair on January 27, 2020 (see Note 15, “Commitment and Contingencies,” “Termination of Tribune and Sinclair Merger Agreement” for additional information with respect to this litigation resolution). Because the lawsuit between Tribune and Sinclair existed before Nexstar’s acquisition of Tribune on September 19, 2019, the bargain purchase gain, net of tax effects, was recorded as a measurement period adjustment to the Tribune acquisition and reduced goodwill. See “2019 Merger with Tribune” below for additional information.

 

Subject to final determination, which is expected to occur within twelve months of the acquisition dates, the provisional fair values of the assets acquired and liabilities assumed associated with the 2020 acquisitions described above are as follows (in thousands):

 

Assets acquired

 

 

 

 

Cash

 

$

2,099

 

Accounts receivable, net

 

 

3,918

 

Prepaid expenses and other current assets

 

 

6,010

 

Property and equipment

 

 

25,896

 

FCC licenses

 

 

39,217

 

Network affiliation agreements

 

 

71,739

 

Goodwill

 

 

7,643

 

Other intangible assets

 

 

6,693

 

Other noncurrent assets

 

 

2,537

 

Total assets acquired

 

 

165,752

 

Less: Broadcast rights payable

 

 

(6,302

)

          Accrued expenses and other current liabilities

 

 

(4,207

)

          Operating lease liabilities

 

 

(1,879

)

          Bargain purchase gain

 

 

(18,980

)

Total Purchase Price

 

$

134,384

 

 

13

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 ($3.3 million) and FCC licenses ($13.3 million) attributable to the stations that Mission acquired from Marshall are deductible for tax purposes. Nexstar is currently evaluating the deductibility of goodwill ($4.3 million) and FCC licenses ($25.9 million) attributable to stations KGBT, WJZY/WMYT and WDKY for tax purposes. 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 9 years.

 

The combined net revenue of $47.2 million and operating income of $17.9 million from the respective stations’ acquisition dates to September 30, 2020 have been included in the accompanying Condensed Consolidated Statements of Operations. Transaction costs related to these acquisitions, including legal and professional fees, were $1.7 million and $4.3 million during the three and nine months ended September 30, 2020, respectively. These costs were included in selling, general and administrative expense, excluding depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations.

 

2020 Dispositions

 

On January 14, 2020, the Company sold its sports betting information website business to Star Enterprises Ltd., a subsidiary of Alto Holdings, Ltd., for a net consideration of $12.9 million (net of $2.4 million cash balance of this business that was transferred to the buyer upon sale). Nexstar recognized a $2.4 million gain on disposal of this business.

 

On March 2, 2020, Nexstar completed the sale of Fox affiliate television station KCPQ and MyNetworkTV affiliate television station KZJO in the Seattle, WA market, as well as Fox affiliate television station WITI in the Milwaukee, WI market, to Fox for approximately $349.9 million in cash, including working capital adjustments. Nexstar recognized a $4.7 million net gain on disposal of these stations. The proceeds from the sale of the stations were partially used to prepay the Company’s term loans (see Note 9, “Debt”).

 

The net gain that resulted from the divestitures of stations and other business was recorded in the Gain on disposal of stations and entities, net in the accompanying Condensed Consolidated Statements of Operations.

 

Pro forma information for the above acquisitions and dispositions has not been provided as the Company believes that the impact of the historical financial results, both individually and in aggregate, to the Company’s revenue, operating income, net income, and earnings per share are not material.

 

2019 Merger with Tribune

 

On September 19, 2019, Nexstar completed its acquisition of Tribune pursuant to a merger agreement (the “Merger”). As a result of the Merger, Nexstar acquired 31 full power stations and one AM radio station in 23 markets (net of divestitures of 13 Tribune full power television stations in 11 markets). Nexstar also acquired WGN America, a national general entertainment cable network, a 31.3% ownership stake in TV Food Network and a portfolio of real estate assets.

Pursuant to the terms of the Merger Agreement, upon completion of the Merger, each issued and outstanding share of Tribune Class A common stock, par value $0.001 per share (the “Tribune Class A Stock”) and Tribune Class B common stock, par value $0.001 per share (“Tribune Class B Stock,” and together with the Tribune Class A Stock, the “Tribune Stock”) immediately prior to the Closing Date of the Merger, other than shares or other securities representing capital stock in Tribune owned, directly or indirectly, by Nexstar or any of its subsidiaries or any subsidiary of Tribune, was converted into the right to receive $46.687397 in cash (the “Merger Consideration”).

Upon completion of the Merger, each option to purchase shares of Tribune Stock outstanding as of immediately prior to the Closing Date (a “Tribune Stock Option”), whether or not vested or exercisable, was cancelled and converted into the right to receive a cash payment equal to the excess, if any, of the value of the Merger Consideration over the exercise price per share of such Tribune Stock Option, without any interest and subject to all applicable withholding.  Any Tribune Stock Option with an exercise price per share greater than or equal to the Merger Consideration was cancelled for no consideration or payment.

Upon completion of the Merger, each award of Tribune restricted stock units outstanding as of immediately prior to the Closing Date (“Tribune RSUs”), whether or not vested, immediately vested and was cancelled and converted into the right to receive a cash payment equal to the product of the total number of shares of Tribune Stock underlying such Tribune RSUs multiplied by the Merger Consideration, without any interest and subject to all applicable withholding (the “RSU Consideration”), except that each award of Tribune RSUs granted to an employee on or after December 1, 2018 (other than Tribune RSUs required to be granted pursuant to specified employment agreements or offer letters) (“Annual Tribune RSUs”) that had vested as of the Closing Date was cancelled and converted into the right to receive the RSU Consideration and any Annual Tribune RSUs that remained unvested as of the Closing Date were cancelled for no consideration or payment.


14

Upon completion of the Merger, each award of Tribune performance stock units outstanding as of immediately prior to the Closing Date (“Tribune PSUs”), whether or not vested, immediately vested (with performance conditions for each open performance period as of the Closing Date deemed achieved at the applicable “target” level performance for such Tribune PSUs) and was cancelled and converted into the right to receive a cash payment equal to the product of the total number of shares of Tribune Stock underlying such Tribune PSUs multiplied by the Merger Consideration, without any interest and subject to all applicable withholding.

Upon completion of the Merger, each outstanding award of Tribune deferred stock units outstanding as of immediately prior to the Closing Date (“Tribune DSUs”) was cancelled and converted into the right to receive a cash payment equal to the product of the total number of shares of Tribune Stock underlying such Tribune DSUs multiplied by the Merger Consideration, without interest and subject to all applicable withholding.

Upon completion of the Merger, each unexercised warrant to purchase shares of Tribune Stock outstanding as of immediately prior to the Closing Date (a “Tribune Warrant”) was assumed by Nexstar and converted into a warrant exercisable for the Merger Consideration which the shares of Tribune Stock underlying such Tribune Warrant would have been entitled to receive upon consummation of the Merger and otherwise upon the same terms and conditions of such Tribune Warrant immediately prior to the Closing Date.

The following table summarizes the components of the total consideration paid or payable upon closing of the Merger (in thousands):

 

Cash consideration and related taxes

 

$

4,197,198

 

Warrants replacement awards

 

 

1,008

 

Repayment of Tribune debt, including premium and accrued interest

 

 

2,988,833

 

Gross purchase price

 

 

7,187,039

 

Less: Gross selling price of Tribune Divestitures, including working capital adjustments

 

 

(1,007,745

)

Net purchase price

 

$

6,179,294

 

Substantially concurrently with the Merger, Nexstar also completed the previously announced sale of the assets of 21 full power television stations in 16 markets to TEGNA, Inc., E.W. Scripps Company and Circle City Broadcasting I, Inc. The total consideration of these divestitures was approximately $1.36 billion (inclusive of working capital adjustments). These divestitures were previously agreed upon by Nexstar and Tribune to comply with the FCC’s local television ownership rule and the FCC’s national ownership cap and to facilitate Department of Justice (“DOJ”) approval of the Merger. Eight of the divested television stations were previously owned by Nexstar and were sold for an estimated $358.6 million in cash, including working capital adjustments (the “Nexstar Divestitures”). Nexstar recognized a $105.9 million gain on the Nexstar Divestitures. The other 13 television stations, which were previously owned or operated by Tribune, were sold for an estimated $1.008 billion in cash, including working capital adjustments (the “Tribune Divestitures”). Nexstar recognized a $9.8 million loss on disposal on the Tribune Divestitures, representing selling costs incurred with their disposition. The net gain that resulted from the Nexstar Divestitures and the Tribune Divestitures was recorded in the Gain on disposal of stations, net in the Condensed Consolidated Statements of Operations.

The cash consideration, the repayment of then-existing indebtedness of Tribune and the related fees and expenses were funded through a combination of proceeds from station divestitures, proceeds from the $1.120 billion 5.625% Notes due 2027 (See Note 9), Term Loan A and Term Loan B borrowings in 2019 and cash on hand of Nexstar and Tribune.

The estimated fair values of the assets acquired, liabilities assumed, and noncontrolling interests (net of the effects of the Tribune Divestitures) are as follows (in thousands):

 

15

 

 

Purchase Price

 

Assets acquired

 

Allocation (1)

 

Cash and cash equivalents

 

$

1,289,251

 

Restricted cash and cash equivalents

 

 

16,609

 

Accounts receivable, net

 

 

366,820

 

Prepaid expenses and other current assets

 

 

227,770

 

Property and equipment

 

 

511,255

 

Goodwill

 

 

896,154

 

FCC licenses

 

 

1,249,286

 

Network affiliation agreements

 

 

1,303,858

 

Other intangible assets

 

 

742,114

 

Equity investments

 

 

1,460,440

 

Assets held for sale

 

 

239,750

 

Other noncurrent assets

 

 

276,099

 

Total assets acquired

 

 

8,579,406

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

Accounts payable

 

 

(41,233

)

Accrued expenses and other current liabilities

 

 

(358,632

)

Income taxes payable

 

 

(158,873

)

Deferred tax liabilities

 

 

(1,073,524

)

Other noncurrent liabilities

 

 

(761,649

)

Total liabilities assumed

 

 

(2,393,911

)

Noncontrolling interests

 

 

(6,201

)

Net assets acquired and consolidated

 

$

6,179,294

 

 

(1)

The purchase price allocation includes the effects of measurement period adjustments recorded in the fourth quarter of 2019 and in fiscal year 2020 as further discussed below.

 

The estimated purchase price allocation presented above is based upon management’s estimate of the fair value of the acquired assets and assumed liabilities using valuation techniques including income, cost, and market approaches. The fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.

 

We recorded measurement period adjustments in accordance with FASB’s guidance regarding business combinations in the fourth quarter of fiscal year 2019 and in fiscal year 2020 based on our valuation and purchase price allocation procedures as well as new information obtained about facts and circumstances that existed as of the acquisition date, as follows:  

 

In the fourth quarter of 2019, Nexstar recorded measurement period adjustments to Tribune’s initial purchase price allocation as a result of ongoing valuation procedures on assets acquired and liabilities assumed, including (i) a decrease in property and equipment and FCC licenses of $8.9 million and $172.2 million, respectively, (ii) an increase in the network affiliation agreements and other intangible assets of $34.8 million and $252.0 million, respectively, (iii) a decrease in deferred tax liabilities and other long-term liabilities of $9.4 million and $8.0 million, respectively, (iv) a decrease in the equity investment in TV Food Network of $22.5 million as well as certain changes in the basis difference between the estimated fair values and carrying values of TV Food Network’s assets had the fair value of Nexstar’s investment been allocated to the identifiable assets of the investee, increasing the basis difference in TV Food Network’s amortizable assets and decreasing the basis difference in TV Food Network’s non-amortizable assets, and (v) a decrease in goodwill by $66.6 million due to the measurement period adjustments discussed in items (i) through (iv). The impact of the measurement period adjustments relating to the network affiliation agreements and other intangible assets to the results of operations is an increase in amortization of intangibles of $9.8 million from the acquisition date to December 31, 2019. The impact of the measurement period adjustment relating to the investment in TV Food Network to the results of operations is an increase in the amortization of the basis difference of $16.0 million from the acquisition date to December 31, 2019, which is included under “Income (loss) on equity investments, net” in the Consolidated Statements of Operations and Comprehensive Income.  The increase in the amortization of basis difference was primarily due to the increase in the basis difference in TV Food Network’s amortizable assets.

 


16

In 2020, Nexstar recorded additional measurement period adjustments, including (i) a $121.7 million increase in other current assets, (ii) a decrease in goodwill of $94.8 million, (iii) a decrease in accrued expenses and other current liabilities of $3.0 million, (iv) an increase in income tax payable of $32.3 million, and (v) a decrease in deferred tax liabilities of $2.4 million. These measurement period adjustments were primarily attributable to Nexstar’s settlement with Sinclair, dated January 27, 2020, to resolve the existing lawsuit between Tribune and Sinclair. The consummation of the terms of the settlement agreement in 2020 resulted in the recognition of other current assets that Nexstar acquired from its merger with Tribune. Nexstar realized these acquired other current assets upon receiving a cash consideration of $98.0 million from Sinclair on January 27, 2020 and Nexstar completing its acquisition of television station WDKY from Sinclair at a bargain purchase price on September 17, 2020 resulting in a $19.0 million bargain purchase gain (See “2020 Acquisitions” above). The cash consideration received from Sinclair and the gain on bargain purchase of WDKY resulted in an income tax payable of $30.0 million. Both the cash consideration received and the gain on bargain purchase of WDKY from Sinclair, less tax effects, were accounted for as a reduction to the goodwill attributable to the Tribune acquisition of $87.0 million. The measurement period adjustments recognized in 2020 had no significant impact on the Company’s Condensed Consolidated Statements of Operations in the current year and prior year.

 

Restricted cash and cash equivalents primarily consist of funds held by Tribune to satisfy the remaining claim obligations pursuant to Tribune’s Chapter 11 reorganization (See Note 15).

 

Property and equipment are being depreciated over their estimated useful lives ranging from 3 years to 39 years.

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 an estimated useful life of 15 years. Other definite-lived intangible assets are amortized over an estimated weighted average useful life of 9 years.

The equity investments primarily include Nexstar’s 31.3% ownership stake in TV Food Network with an estimated fair value of $1.447 billion at acquisition date. The remainder relates to various investments in private companies. See Note 6 for additional information.

The assets held for sale mainly consist of a real estate property located in Chicago.

The carryovers of the tax basis in goodwill ($634 million), FCC licenses ($60 million), network affiliation agreements ($102 million), other intangible assets ($288 million), equity investments ($360 million), and property and equipment, including assets held for sale ($246 million), are deductible for tax purposes.

Nexstar also assumed Tribune’s pension and other postretirement benefit obligations (mainly included in other noncurrent liabilities). See Note 8 for additional information.

The acquisition of certain real estate property located in Chicago (included in property and equipment, net in the estimated purchase price allocation above) resulted in noncontrolling interest of $6.2 million, representing the ownership stake of a third party. The estimated fair value of the noncontrolling interest is estimated by applying the market approach valuation technique.

In connection with the Merger, Nexstar assumed certain contingencies as described further in Note 15.

Tribune’s net revenue of $471.6 million and operating income of $78.4 million from September 19, 2019 to December 31, 2019 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 $31.0 million, were expensed as incurred during the three months ended September 30, 2019 and $38.3 million during the nine months ended September 30, 2019. These costs were included in selling, general and administrative expense, excluding depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations.

 


17

Unaudited Pro Forma Information

 

The following unaudited pro forma information (in thousands) has been presented for the periods indicated as if the Merger with Tribune had occurred on January 1, 2018. The unaudited pro forma information combined the historical results of Nexstar and Tribune, 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 Merger had taken place at the beginning of fiscal year 2018.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2019

 

Net revenue

 

$

961,395

 

 

$

2,923,988

 

Income before income taxes

 

 

11,000

 

 

 

268,427

 

Net (loss) income

 

 

(19,088

)

 

 

175,531

 

Net (loss) income attributable to Nexstar

 

 

(19,757

)

 

 

170,145

 

 

Future Acquisitions

 

On July 8, 2020, Nexstar assigned to Mission its option to purchase the CW affiliated station WPIX in the New York, NY market from The E.W. Scripps Company (“Scripps”). On the same date, Mission notified Scripps of its exercise of the option to purchase the station for a purchase price of $75.0 million, subject to customary adjustments, plus accrued interest in accordance with the option agreement. Mission expects to fund this acquisition through its new borrowing that is to be guaranteed by Nexstar. On August 28, 2020, Mission signed a purchase agreement to acquire WPIX. The acquisition is subject to FCC approval and other customary conditions and Mission expects it to close at the end of 2020. This acquisition will allow Mission entrance into this market. Upon Mission’s acquisition of WPIX, Nexstar intends to enter into a local service agreement and option agreement. Nexstar previously acquired WPIX through a merger with Tribune but simultaneously sold the station to Scripps on September 19, 2019. Under Nexstar’s sale agreement with Scripps, Nexstar was granted an assignable option to purchase the station.

 

On August 7, 2020, Nexstar assigned to Mission its option to purchase the assets of WNAC, the Fox affiliated full power television station serving the Providence, Rhode Island market, from WNAC, LLC. On the same date, Mission entered into an Assignment and Assumption Agreement with Nexstar and notified WNAC, LLC of its exercise of the option. The purchase price is equal to a base purchase price, plus an escalation amount per day from the date of the option agreement until the completion of the acquisition, minus a credit for an outstanding loan (all defined in the option agreement). Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition has received FCC approval and Mission expects it to close in the fourth quarter of 2020. Nexstar currently provides services to WNAC under an LMA (See Note 2, “Variable Interest Entities”) which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase WNAC from Mission.

 

On August 7, 2020, Nexstar also assigned to Mission its option to purchase KASY, KWBQ and KRWB from Tamer. KASY (MNTV affiliated), KWBQ (CW affiliated) and KRWB (CW affiliated) are full power television stations serving the Albuquerque, New Mexico market. On the same date, Mission entered into an Assignment and Assumption Agreement with Nexstar and notified Tamer of its exercise of the option. The purchase price is equal to a base purchase price, plus an escalation amount per year from the date of the option agreement until completion of the acquisition, minus a fixed monthly credit from the date of the option agreement until completion of the acquisition (all defined in the option agreement). Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition has received FCC approval and Mission expects it to close in the fourth quarter of 2020. Nexstar currently provides services to these stations under an SSA (See Note 2, “Variable Interest Entities”) which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase the stations from Mission.

 

18

On August 10, 2020, Nexstar assigned to Mission its options to purchase WXXA-TV, the Fox affiliate in the Albany, NY market, and WLAJ TV, the ABC affiliate in the Lansing, MI market, from Shield (“Shield Stations”). On the same date, Mission entered into an Assignment and Assumption Agreement with Nexstar and notified Shield of its exercise of the options to purchase the stations. The purchase price of these stations is $20.8 million. Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition of the Shield Stations has received FCC consent and Mission expects to close in the fourth quarter of 2020. Nexstar currently provides services to the Shield Stations under JSAs and SSAs (See Note 2, “Variable Interest Entities”) which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase the stations from Mission.

 

Note 4:  Intangible Assets and Goodwill

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

 

 

 

Estimated

 

September 30, 2020

 

 

December 31, 2019

 

 

 

useful life,

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

in years

 

Gross

 

 

Amortization

 

 

Net

 

 

Gross

 

 

Amortization

 

 

Net

 

Network affiliation agreements

 

15

 

$

3,118,357

 

 

$

(827,673

)

 

$

2,290,684

 

 

$

3,223,906

 

 

$

(691,640

)

 

$

2,532,266

 

Other definite-lived intangible assets

 

1-20

 

 

965,293

 

 

 

(300,893

)

 

 

664,400

 

 

 

961,350

 

 

 

(233,996

)

 

 

727,354

 

Other intangible assets

 

 

 

$

4,083,650

 

 

$

(1,128,566

)

 

$

2,955,084

 

 

$

4,185,256

 

 

$

(925,636

)

 

$

3,259,620

 

The following table presents the Company’s estimate of amortization expense for the remainder of 2020, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of September 30, 2020 (in thousands):

 

Remainder of 2020

 

$

72,775

 

2021

 

 

271,338

 

2022

 

 

268,939

 

2023

 

 

266,054

 

2024

 

 

264,272

 

Thereafter

 

 

1,811,706

 

 

 

$

2,955,084

 

 

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

 

 

 

Goodwill

 

 

FCC Licenses

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Gross

 

 

Impairment

 

 

Net

 

 

Gross

 

 

Impairment

 

 

Net

 

Balances as of December 31, 2019

 

$

3,129,169

 

 

$

(132,294

)

 

$

2,996,875

 

 

$

2,968,875

 

 

$

(47,410

)

 

$

2,921,465

 

Current year acquisitions (See Note 3)

 

 

7,643

 

 

 

-

 

 

 

7,643

 

 

 

39,217

 

 

 

-

 

 

 

39,217

 

Current year divestitures (See Note 3)

 

 

(48,429

)

 

 

-

 

 

 

(48,429

)

 

 

(104,308

)

 

 

-

 

 

 

(104,308

)

Measurement period adjustments related to Nexstar and Tribune merger (See Note 3)

 

 

(94,775

)

 

 

-

 

 

 

(94,775

)

 

 

-

 

 

 

-

 

 

 

-

 

Balances as of September 30, 2020

 

$

2,993,608

 

 

$

(132,294

)

 

$

2,861,314

 

 

$

2,903,784

 

 

$

(47,410

)

 

$

2,856,374

 

 


19

In each of the first three quarters of 2020, the Company evaluated the changes in facts and circumstances and general market declines resulting from the COVID-19 pandemic, including their impact on its current operating results and whether an impairment triggering event has occurred on its indefinite-lived intangible assets, long-lived assets (including finite-lived intangible assets) and reporting units with goodwill. Based on the results of the evaluation, the Company concluded that, as of September 30, 2020, no impairment triggering events had occurred on these assets, mainly because as of this date, the Company’s market capitalization exceeded the carrying amount of its equity by a substantial amount. Despite the adverse effects of COVID-19 in the Company’s financial results, mostly in the first part of the second quarter of 2020, there were significant improvements in the Company’s financial results as certain areas throughout the United States permitted the re-opening of non-essential businesses which has had a favorable impact to the macroeconomic environment and to the Company’s revenue. In the third quarter of 2020 and on a year to date basis, the Company remained profitable. There were also no material changes in its customer mix, including advertisers, multichannel video programming distributors and online video distributors. Due to the continued impact of the COVID-19 pandemic subsequent to September 30, 2020, the Company will continue to evaluate its indefinite-lived intangible assets, long-lived assets and goodwill to determine if an impairment triggering event will occur in future periods. Any further adverse impact of COVID-19 or the general market conditions on the Company’s operating results could reasonably be expected to negatively impact the fair value of the Company’s indefinite-lived intangible assets and its reporting units as well as the recoverability of its long-lived assets and may result in future impairment charges which could be material.

 

Note 5:  Assets Held for Sale

 

Assets held for sale in the Company’s Condensed Consolidated Balance Sheets consisted of the following (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Real estate

 

$

4,524

 

 

$

240,524

 

 

In January 2020, management deferred its planned disposition of certain non-depreciable real estate property located in Chicago with a carrying amount of $236.0 million. In December 2019, the asset was previously classified as held for sale. The decision to defer the sale effort was driven by current uncertainties in the local government’s policies around property taxes which could impact a potential buyer’s perception of the property’s fair market value. Because the property is land with no limited useful life, management believes that, as of September 30, 2020, its fair value exceeded the carrying value and there was no impairment. As a result of this development, the property no longer meets the criteria of classifying as held for sale as it is not probable to sell the property within one year. Thus, the Company reclassified this asset from held for sale to property, plant and equipment (held and used) in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2020. The reclassification of the land property did not impact the Company’s results of operations during the three and nine months ended September 30, 2020.

 

Note 6:  Investments

 

Investments consisted of the following (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Equity method investments

 

$

1,308,794

 

 

$

1,471,866

 

Other equity investments

 

 

5,064

 

 

 

5,487

 

Total investments

 

$

1,313,858

 

 

$

1,477,353

 

 

Equity Method Investments

 

The Company’s equity method investments primarily included Nexstar’s investment in TV Food Network, in which Nexstar has an ownership stake of 31.3%. Nexstar acquired its investment in TV Food Network through the Merger (See Note 3). Nexstar’s partner in TV Food Network is Discovery, Inc. (“Discovery”), which owns a 68.7% interest in TV Food Network and operates the network on behalf of the partnership. As of September 30, 2020, Nexstar’s investment in TV Food Network had a book value of $1.289 billion. The Company received cash distributions from TV Food Network totaling $9.9 million and $207.0 million during the three and nine months ended September 30, 2020, respectively.

 

TV Food Network owns and operates “The Food Network,” a 24-hour lifestyle cable television channel focusing on food and related topics. TV Food Network also owns and operates “The Cooking Channel,” a cable television channel primarily devoted to cooking instruction, food information and other related topics. TV Food Network’s programming is distributed by cable and satellite television systems.

 

20

The partnership agreement governing TV Food Network provides that the partnership shall, unless certain actions are taken by the partners, dissolve and commence winding up and liquidating TV Food Network upon the first to occur of certain enumerated liquidating events, one of which is a specified date of December 31, 2020. Nexstar intends to renew its partnership agreement with Discovery on TV Food Network. In the event of a liquidation, Nexstar would be entitled to its proportionate share of distributions to partners which the partnership agreement provides would occur as promptly as is consistent with obtaining fair market value for the assets of TV Food Network. The partnership agreement also provides that the partnership may be continued or reconstituted in certain circumstances.

 

At acquisition date, the Company measured its estimated share of the differences between the estimated fair values and carrying values (the “basis difference”) of the investees’ tangible assets and amortizable intangible assets had the fair value of the investments been allocated to the identifiable assets of the investees in accordance with ASC Topic 805 “Business Combinations.” Additionally, the Company measured its estimated share of the basis difference attributable to investees’ goodwill. As a result of its acquired investment in TV Food Network on September 19, 2019 through the Merger, Nexstar estimated a total of $853.2 million for its share of the basis difference attributable to investees’ amortizable intangible assets. Nexstar also estimated a basis difference of $500.4 million attributable to investees’ goodwill.

 

The Company amortizes its share of the basis differences attributable to tangible assets and intangible long-lived assets of investees, including TV Food Network, and records the amortization (the “amortization of basis difference”) as a reduction of income on equity investments, net in the unaudited Condensed Consolidated Statements of Operations. As of September 30, 2020, the Company’s remaining share of basis difference related to equity method investments, including TV Food Network, totaled $702.8 million and has a weighted average remaining useful life of approximately 6.0 years.

 

Income (loss) on equity investments, net reported in the Company’s unaudited Condensed Consolidated Statements of Operations consisted of the following (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

2019

 

Income on equity investments, net, before amortization of basis difference

 

$

52,801

 

 

$

7,242

 

 

$

152,170

 

$

6,302

 

Amortization of basis difference

 

 

(36,940

)

 

 

(4,025

)

 

 

(110,819

)

 

(4,241

)

Income on equity investments, net

 

$

15,861

 

 

$

3,217

 

 

$

41,351

 

$

2,061

 

 

Summarized financial information for TV Food Network is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 19, 2019 to

 

 

 

September 30, 2020

 

 

September 30, 2020

 

 

September 30, 2019

 

Net revenue

 

$

306,390

 

 

$

933,929

 

 

$

46,437

 

Costs and expenses

 

 

137,156

 

 

 

448,760

 

 

 

16,852

 

Income from operations

 

 

169,233

 

 

 

485,169

 

 

 

29,585

 

Net income

 

 

170,543

 

 

 

491,957

 

 

 

24,991

 

Net income attributable to Nexstar Media Group, Inc.

 

 

53,370

 

 

 

153,953

 

 

 

7,822

 

 

In each of the first three quarters of 2020, the Company evaluated its equity method investments for other-than-temporary impairment (“OTTI”) due to the events and circumstances surrounding the COVID-19 pandemic. Based on the results of the review, the Company determined that an OTTI had not occurred as of September 30, 2020. The Company may experience future declines in the fair value of its equity method investments, and it may determine an impairment loss will be required to be recognized in a future reporting period. Such determination will be based on the prevailing facts and circumstances, including those related to the reported results and financial statement disclosures of the investees as well as the general market conditions. The Company will continue to evaluate its equity method investments in future periods to determine if an OTTI has occurred.

 

Other Equity Investments

 

Other equity investments are investments without readily determinable fair values. All of the Company’s other equity investments are ownership interests in private companies. These assets were recorded at cost, subject to periodic evaluation of the carrying values.


21

Note 7:  Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Compensation and related taxes

 

$

85,840

 

 

$

88,372

 

Interest payable

 

 

31,391

 

 

 

88,600

 

Network affiliation fees

 

 

51,217

 

 

 

62,901

 

Other

 

 

111,368

 

 

 

182,638

 

 

 

$

279,816

 

 

$

422,511

 

 

Note 8:  Retirement and Postretirement Plans

 

On January 17, 2017, Nexstar assumed Media General’s pension and postretirement plan obligations upon consummation of the merger of the entities. As a result, Nexstar has a funded, qualified non-contributory defined benefit retirement plan which covers certain employees and former employees. Additionally, there are non-contributory unfunded supplemental executive retirement and ERISA excess plans which supplement the coverage available to certain executives. All of these retirement plans are frozen. Nexstar also has a retiree medical savings account plan which reimburses eligible retired employees for certain medical expenses and an unfunded plan that provides certain health and life insurance benefits to retired employees who were hired prior to 1992.

 

On September 19, 2019, Nexstar assumed Tribune’s pension and postretirement obligations upon consummation of the merger of the entities. As a result, Nexstar has a qualified and non-contributory defined benefit retirement plan which covers certain of Tribune’s employees and former employees. This retirement plan is frozen in terms of pay and service. Nexstar also assumed three defined benefit pension plans (two of which are frozen with the third representing 2% of the total Tribune related projected benefit obligation) for Tribune’s other employees and former employees.  These three plans are not material individually or in aggregate.  Nexstar also provides postretirement health care and life insurance benefits to eligible employees (who retired prior to January 1, 2016) under a variety of plans.

 

The following tables provide the components of net periodic benefit cost (credit) for Nexstar’s pension and other postretirement benefit plans (“OPEB”) (in thousands):

 

 

 

Media General

 

 

Tribune

 

 

 

Pension Benefits

 

 

OPEB

 

 

Pension Benefits

 

 

OPEB

 

 

 

Three Months Ended September 30,

 

 

Three Months Ended September 30,

 

 

Three Months Ended September 30,

 

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service cost

 

$

-

 

 

$

-

 

 

$

5

 

 

$

-

 

 

$

248

 

 

$

32

 

 

$

-

 

 

$

-

 

Interest cost

 

 

2,925

 

 

 

3,875

 

 

 

138

 

 

 

200

 

 

 

13,374

 

 

 

1,841

 

 

 

33

 

 

 

5

 

Expected return on plan assets

 

 

(4,925

)

 

 

(5,475

)

 

 

-

 

 

 

-

 

 

 

(22,341

)

 

 

(3,024

)

 

 

-

 

 

 

-

 

Amortization of prior service costs

 

 

-

 

 

 

-

 

 

 

(13

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Amortization of net loss

 

 

-

 

 

 

-

 

 

 

43

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net periodic benefit cost (credit)

 

$

(2,000

)

 

$

(1,600

)

 

$

173

 

 

$

200

 

 

$

(8,719

)

 

$

(1,151

)

 

$

33

 

 

$

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Media General

 

 

Tribune

 

 

 

Pension Benefits

 

 

OPEB

 

 

Pension Benefits

 

 

OPEB

 

 

 

Nine Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service cost

 

$

-

 

 

$

-

 

 

$

15

 

 

$

-

 

 

$

744

 

 

$

32

 

 

$

-

 

 

$

-

 

Interest cost

 

 

8,775

 

 

 

11,625

 

 

 

413

 

 

 

600

 

 

 

40,122

 

 

 

1,841

 

 

 

99

 

 

 

5

 

Expected return on plan assets

 

 

(14,775

)

 

 

(16,425

)

 

 

-

 

 

 

-

 

 

 

(67,023

)

 

 

(3,024

)

 

 

-

 

 

 

-

 

Amortization of prior service costs

 

 

-

 

 

 

-

 

 

 

(38

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Amortization of net loss

 

 

-

 

 

 

-

 

 

 

128

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net periodic benefit cost (credit)

 

$

(6,000

)

 

$

(4,800

)

 

$

518

 

 

$

600

 

 

$

(26,157

)

 

$

(1,151

)

 

$

99

 

 

$

5

 

 

 


22

During the three and nine months ended September 30, 2020, Nexstar’s cash contributions to the Tribune qualified pension plans were $0 and $5.7 million, respectively. During the three and nine months ended September 30, 2019, Nexstar made no cash contribution to the Tribune qualified pension plans. In 2020 and 2019, there were no mandatory cash contribution requirements for the Media General qualified pension plans and for the Tribune and Media General OPEB.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law and includes a provision that allows employers to defer payment of contributions to U.S. defined benefit pension plans due in 2020 until January 1, 2021. Nexstar elected not to defer the remaining cash contribution requirements to its qualified pension plans under the CARES Act. In October 2020, Nexstar fulfilled its remaining contribution requirements to the Tribune qualified pension plans for the current year (See Note 17).

 

The primary investment objective of the pension benefit plans is to build and ensure an adequate pool of assets to support the benefit obligations to participants, retirees and beneficiaries. To meet this objective, the pension benefit plans seek to earn a rate of return on assets greater than the liability discount rate, with a prudent level of risk and diversification. The current investment policy includes a strategy intended to maintain an adequate level of diversification, subject to normal portfolio risks. As a result of the general market downturn resulting from the COVID-19 pandemic, the fair value of the pension plans’ assets declined in the first half of 2020. The market significantly rebounded in the third quarter of 2020 but remains volatile. While the Company continues to monitor the performance of the pension plans’ assets, the fluctuations have not materially impacted the Company’s financial position or liquidity in the first three quarters of 2020. To the extent that there is further material deterioration in plan assets, the Company’s pension benefit plans may require additional contributions and/or may negatively impact future pension credit or expense of the Company.

 

In September 2020, the Tribune defined benefit retirement plans offered certain terminated vested participants a voluntary, limited time offer to receive their pension benefit in a single lump sum payment or to start a monthly payment, payable as of December 1, 2020. To be eligible for this offer, participants must have terminated employment prior to July 1, 2020, such employment shall remain terminated through December 1, 2020 and have a lump sum value of $50,000 or less. If a participant commences benefits, dies, or is rehired prior to December 1, 2020, the offer shall no longer be valid. The participants eligible to take this limited time offer can submit their elections on or before October 31, 2020. As of the filing of this Quarterly Report on Form 10-Q, Nexstar is unable to reasonably estimate the benefit payments from the Tribune pension plan assets in connection with this offer. However, we anticipate the Tribune qualified pension plans will make benefit payments from the pension plan assets in the fourth quarter of 2020.

 

Note 9:  Debt

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

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Term loans

 

$

4,956,865

 

 

$

5,914,703

 

Revolving loans

 

 

225,000

 

 

 

-

 

5.625% Notes due 2024

 

 

-

 

 

 

900,000

 

5.625% Notes due 2027

 

 

1,785,000

 

 

 

1,785,000

 

4.75% Notes due 2028

 

 

1,000,000

 

 

 

-

 

Total outstanding principal

 

 

7,966,865

 

 

 

8,599,703

 

Less: unamortized financing costs and discount - Term Loans

 

 

(81,194

)

 

 

(104,281

)

Less: unamortized financing costs and discount - 5.625% Notes due 2024

 

 

-

 

 

 

(9,955

)

Add: unamortized premium, net of financing costs - 5.625% Notes due 2027

 

 

6,185

 

 

 

7,121

 

Less: unamortized financing costs and discount - 4.75% Notes due 2028

 

 

(9,316

)

 

 

-

 

Total outstanding debt

 

 

7,882,540

 

 

 

8,492,588

 

Less:  current portion

 

 

(22,921

)

 

 

(109,310

)

Long-term debt, net of current portion

 

$

7,859,619

 

 

$

8,383,278

 

 

23

2020 Transactions

On September 3, 2020, Nexstar and Mission amended their respective credit agreements (also herein referred to as senior secured credit facilities), which provides for first lien term loans and revolving credit facilities. The amendments provide for a new senior secured revolving credit facility (the “2020 Revolving Facility”) in an aggregate capacity of $280.0 million, of which $30.0 million was initially allocated to Nexstar and $250.0 million was initially allocated to Mission. The 2020 Revolving Credit Facility is in addition to the $139.7 million and $3.0 million unused capacities under Nexstar’s and Mission’s existing revolving credit facilities, respectively. The 2020 Revolving Facility bears interest at the LIBOR rate, with a margin in the range of 1.75% to 2.50%, determined based on a leverage-based grid. The terms of the 2020 Revolving Facility are substantially the same as Nexstar’s and Mission’s existing revolving credit facilities, including the maturity date of October 26, 2023. The amendments also made certain changes to the Mission credit agreement, including to permit the consummation of the acquisition of WPIX by Mission, for which a purchase agreement was signed on August 28, 2020 (see Note 3, “Acquisitions and Dispositions”), and other future acquisitions by Mission as a general matter.

Following the establishment of the 2020 Revolving Facility, Mission reallocated its $3.0 million available capacity under its existing revolving credit facility to Nexstar. Mission also drew upon $225.0 million under the 2020 Revolving Facility and used the proceeds to pay in full the remaining outstanding principal balance under Mission’s term B loan of $224.5 million. The prepayment of Mission’s term B loan resulted in a loss on extinguishment of debt of $2.7 million representing write-off of unamortized debt financing costs and discounts.

On September 25, 2020, Nexstar completed the sale and issuance of $1.0 billion 4.75% senior unsecured notes due 2028 (“4.75% Notes due 2028”) at par. The 4.75% Notes due 2028 were issued under an indenture dated as of September 25, 2020 (“4.75% Notes due 2028 Indenture”). The net proceeds from the issuance of the 4.75% Notes due 2028 was used to redeem the $900.0 million 5.625% senior unsecured notes due 2024 (“5.625% Notes due 2024”) in full at a redemption price equal to 102.813% of the principal amount thereof, plus accrued and unpaid interest and related fees and expenses. The remainder of the proceeds was used for general corporate purposes. The redemption of the 5.625% Notes due 2024 resulted in a loss on extinguishment of debt of $33.9 million in the condensed consolidated statements of operations, representing premiums paid to retire the 5.625% Notes due 2024 and write-off of unamortized debt financing costs and discounts.

The 4.75% Notes due 2028 will mature on November 1, 2028. Interest on the 4.75% Notes due 2028 is payable semiannually in arrears on May 1 and November 1 of each year, with the first interest payment due on May 1, 2021. The 4.75% Notes due 2028 are guaranteed by Nexstar, Mission and certain of Nexstar’s and Mission’s existing and future restricted subsidiaries, subject to certain customary release provisions.

The 4.75% Notes due 2028 are senior unsecured obligations of Nexstar and the guarantors, rank equal in right of payment with our and the guarantors’ existing and future senior indebtedness, including Nexstar’s 5.625% senior unsecured notes due 2027 (the “5.625% Notes due 2027”), its term loans and its revolving credit facilities, but effectively junior to our and the guarantors’ secured debt, including the term loans and revolving credit facilities, to the extent of the value of the assets securing such debt.

 

Nexstar has the option to redeem all or a portion of the 4.75% Notes due 2028 at any time prior to November 1, 2023 at a price equal to 100% of the principal amount redeemed plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus a make-whole premium as of the date of redemption. At any time prior to November 1, 2023, Nexstar may also redeem up to 40% of the aggregate principal amount at a redemption price of 104.75%, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds from certain equity offerings. At any time on or after November 1, 2023, Nexstar may redeem the 4.75% Notes due 2028, in whole or in part, at the redemption prices set forth in the 4.75% Notes due 2028 Indenture.

 

Upon the occurrence of a change in control (as defined in the 4.750% Notes due 2028 Indenture), each holder of the 4.75% Notes due 2028 may require Nexstar to repurchase all or a portion of the 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 4.75% Notes due 2028 Indenture contains covenants that limit, among other things, Nexstar’s and the guarantors’ 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) transfer or sell assets, (5) create liens, (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) guarantee certain indebtedness and (8) engage in transactions with affiliates.

 

The 4.75% Notes due 2028 Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants, 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 and is continuing, the Trustee or holders of at least 25% in principal amount of the then outstanding 4.75% Notes due 2028 may declare the principal of, premium, and accrued but unpaid interest, including additional interest, on all the 4.75% Notes due 2028 to be due and payable. Upon such a declaration, such principal, premium and accrued and unpaid interest will be due and payable immediately.

24

As of September 30, 2020, Nexstar recorded $9.3 million in legal, professional and underwriting fees related to the new 4.750% Notes due 2028. Debt financing costs are netted against the carrying amount of the related debt.

During the nine months ended September 30, 2020, Nexstar prepaid a total of $480.0 million in principal balance under its term loans, funded by cash on hand. On March 9, 2020, Nexstar also made an additional principal prepayment of $200.0 million on its term loans pursuant to the mandatory prepayment requirement of its amended credit agreement. The mandatory prepayment resulted from the disposition of certain television station assets in the Seattle, WA and Milwaukee, WI markets to Fox (see Note 3, “Acquisitions and Dispositions”). The total prepayments of term loans resulted in a loss on extinguishment of debt of $8.4 million for the nine months ended September 30, 2020, representing write-offs of unamortized debt financing costs and discounts.

During the nine months ended September 30, 2020, the Company also repaid scheduled principal maturities of $53.3 million of its term loans, funded by cash on hand.

Unused Commitments and Borrowing Availability

The Company had $172.7 million and $25.0 million of unused revolving loan commitments under the respective Nexstar and Mission senior secured credit facilities, all of which were available for borrowing, based on the covenant calculations as of September 30, 2020. 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, 2020, the Company was in compliance with its financial covenants. 

Collateralization and Guarantees of Debt

The Company’s credit facilities described above are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses and the other assets of consolidated VIEs unavailable to creditors of Nexstar (See Note 2). Nexstar guarantees full payment of all obligations incurred under the Mission and Shield senior secured credit facilities in the event of their default. Mission and Nexstar Digital LLC (“Nexstar Digital”), a wholly-owned subsidiary of Nexstar, are both guarantors of Nexstar’s senior secured credit facility. Mission is also a guarantor of Nexstar’s 5.625% Notes due 2027 and 4.750% Notes due 2028. Nexstar Digital does not guarantee any of the notes. Shield is not a guarantor 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, exclusive of stations in the Shreveport, Louisiana, Odessa, Texas and Quad Cities, Iowa/Illinois markets, to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. These option agreements, which expire on various dates between 2021 and 2028, are freely exercisable or assignable by Nexstar without consent or approval by Mission. The Company expects these option agreements to be renewed upon expiration.

 

Debt Covenants

 

The Nexstar credit agreement (senior secured credit facility) contains a covenant which requires Nexstar to comply with a maximum consolidated first lien net leverage ratio of 4.25 to 1.00. The financial covenant, which is formally calculated on a quarterly basis, is based on the combined results of the Company. The Mission 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, 2020, the Company was in compliance with its financial covenants.

 


25

Note 10:  Leases

The Company as a Lessee

 

The Company has operating and finance leases for office space, vehicles, tower facilities, antenna sites, studio and other real estate properties and equipment. The Company’s leases have remaining lease terms of one month to 94 years, some of which may include options to extend the leases from two to 99 years, and some of which may include options to terminate the leases within one year. The depreciable lives of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Lease contracts that the Company has executed but which have not yet commenced as of September 30, 2020 were not material and are excluded.

 

Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):

 

 

 

Balance Sheet Classification

 

September 30, 2020

 

 

December 31, 2019

 

Operating leases

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets, net

 

Other noncurrent assets, net

 

$

219,380

 

 

$

235,285

 

   Current lease liabilities

 

Other current liabilities

 

$

34,434

 

 

$

35,043

 

   Noncurrent lease liabilities

 

Other noncurrent liabilities

 

$

171,639

 

 

$

185,722

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

 

 

 

Finance lease right-of-use assets, net of accumulated depreciation of $3,165 as of September 30, 2020 and $2,526 as of December 31, 2019

 

Property, plant and equipment, net

 

$

7,825

 

 

$

8,138

 

   Current lease liabilities

 

Other current liabilities

 

$

1,006

 

 

$

900

 

   Noncurrent lease liabilities

 

Other noncurrent liabilities

 

$

14,417

 

 

$

15,177

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

6.8 years

 

 

7.4 years

 

Finance leases

 

 

 

10.9 years

 

 

11.6 years

 

Weighted Average Discount Rate

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

5.1

%

 

 

5.3

%

Finance leases

 

 

 

 

5.7

%

 

 

5.7

%

 

Operating lease expense for the three months ended September 30, 2020 was $11.6 million, of which $6.0 million and $5.6 million were included in Direct operating and Selling, general and administrative expenses, respectively, excluding depreciation and amortization, in the accompanying Condensed Consolidated Statements of Operations. Operating lease expense for the three months ended September 30, 2019 was $5.4 million, of which $3.1 million and $2.3 million are included in Direct operating and Selling, general and administrative expenses, respectively, excluding depreciation and amortization, in the accompanying Condensed Consolidated Statements of Operations.

 

Operating lease expense for the nine months ended September 30, 2020 was $35.6 million, of which $18.3 million and $17.3 million were included in Direct operating and Selling, general and administrative expenses, respectively, excluding depreciation and amortization, in the accompanying Condensed Consolidated Statements of Operations. Operating lease expense for the nine months ended September 30, 2019 was $16.2 million, of which $9.3 million and $7.0 million were included in Direct operating and Selling, general and administrative expenses, respectively, excluding depreciation and amortization, in the accompanying Condensed Consolidated Statements of Operations.

Supplemental cash flow information related to leases was as follows (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

   Operating cash flows from operating leases

 

$

35,455

 

 

$

16,754

 

   Operating cash flows from finance leases

 

 

676

 

 

 

712

 

   Financing cash flows from finance leases

 

 

652

 

 

 

610

 

26

Future minimum lease payments under non-cancellable leases as of September 30, 2020 were as follows (in thousands):

 

 

 

Operating Leases

 

 

Finance Leases

 

Remainder of 2020

 

$

11,506

 

 

$

467

 

2021

 

 

42,725

 

 

 

1,843

 

2022

 

 

39,858

 

 

 

1,803

 

2023

 

 

36,577

 

 

 

1,818

 

2024

 

 

33,953

 

 

 

1,833

 

Thereafter

 

 

82,990

 

 

 

13,363

 

   Total future minimum lease payments

 

 

247,609

 

 

 

21,127

 

Less: imputed interest

 

 

(41,536

)

 

 

(5,704

)

Total

 

$

206,073

 

 

$

15,423

 

The Company as a Lessor

 

The Company has various arrangements for which it is the lessor for the use of its tower space. These leases meet the criteria for operating lease classification, but the associated lease income is not material. As such, the Company has applied the practical expedient to combine lease and non-lease components in its arrangements as lessor.

 

Note 11:  Fair Value Measurements

 

The Company measures and records in its condensed consolidated financial statements certain assets and liabilities at fair value. ASC Topic 820, “Fair Value Measurement and Disclosures,” establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). This hierarchy consists of the following three levels:

 

•

Level 1 – Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market.

 

•

Level 2 – Assets and liabilities whose values are based on inputs other than those included in Level 1, including quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data.

 

•

Level 3 – Assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement.

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The carrying values of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short-term nature. Estimated fair values and carrying amounts of the Company’s financial instruments that are not measured at fair value on a recurring basis were as follows (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Term loans(1)

 

$

4,875,671

 

 

$

4,834,838

 

 

$

5,810,422

 

 

$

5,915,451

 

Revolving loans(1)

 

 

225,000

 

 

 

225,892

 

 

 

-

 

 

 

-

 

5.625% Senior unsecured notes due 2024(2)

 

 

-

 

 

 

-

 

 

 

890,045

 

 

 

938,250

 

5.625% Senior unsecured notes due 2027(2)

 

 

1,791,185

 

 

 

1,865,325

 

 

 

1,792,121

 

 

 

1,883,175

 

4.75% Senior unsecured notes due 2028(2)

 

 

990,684

 

 

 

1,017,500

 

 

 

-

 

 

 

-

 

 

27

(1) The fair value of senior secured credit facilities is computed based on borrowing rates currently available to the Company for bank loans with similar terms and average maturities. These fair value measurements are considered Level 3, as significant inputs to the fair value calculation are unobservable in the market.

 

(2) The fair value of the Company’s fixed rate debt is estimated based on bid prices obtained from an investment banking firm that regularly makes a market for these financial instruments. These fair value measurements are considered Level 2, as quoted market prices are available for low volume trading of these securities.

During the three and nine months ended 2020, there were no events or changes in circumstance that triggered an impairment to the Company’s significant assets, including equity method investments, indefinite-lived intangible assets, long-lived assets and goodwill. See Notes 4 and 6 for additional information.

 

Note 12:  Common Stock

 

On September 1, 2020, Nexstar’s Board of Directors approved an additional $300 million in Nexstar’s share repurchase authorization to repurchase its Class A common stock. The expansion brings the total capacity under Nexstar’s share repurchase program to approximately $384.2 million when combined with the remaining available amount under its prior authorization and before reduction for any repurchases in the third quarter of 2020. During the three and nine months ended September 30, 2020, Nexstar repurchased a total of 1,300,000 shares and 2,250,000 shares, respectively, of its Class A common stock for $125.0 million and $197.6 million respectively, funded by cash on hand. As of September 30, 2020, the remaining available amount under the share repurchase authorization was $259.2 million.

 

Share repurchases may be made from time to time in open market transactions, block trades or in private transactions. There is no minimum number of shares that Nexstar is required to repurchase and the repurchase program may be suspended or discontinued at any time without prior notice.

 

Note 13:  Income Taxes

 

Income tax expense was $65.2 million for the three months ended September 30, 2020 compared to $39.5 million for the same period in 2019. The effective tax rates, which decreased in the current year, were 25.6% and 115.1% for each of the respective periods. In 2019, Nexstar recorded an income tax expense of $12.8 million attributable to nondeductible goodwill written off as a result of the Nexstar Divestitures related to the merger with Tribune (See Note 3), or a 37.3% decrease to the effective tax rate in 2020. Additionally, the goodwill impairment loss recorded in 2019 was not deductible for purposes of calculating the tax provision and resulted in an income tax expense of $11.1 million in 2019, or a 32.3% decrease to the effective tax rate in 2020. Also, certain transaction and severance costs that Nexstar incurred in connection with its merger with Tribune in 2019 (See Note 3) were determined to be nondeductible for tax purposes. This resulted in an income tax expense of $6.0 million in 2019, or a 17.6% decrease to the effective tax rate in 2020.

 

Income tax expense was $166.9 million for the nine months ended September 30, 2020 compared to $82.6 million for the same period in 2019. The effective tax rates, which decreased in the current year, were 27.3% and 40.3% for each of the respective periods. In 2019, Nexstar recorded an income tax expense of $12.8 million attributable to nondeductible goodwill written off as a result of the Nexstar Divestitures related to the merger with Tribune (See Note 3), or a 6.3% decrease to the effective tax rate in 2020. Additionally, the goodwill impairment loss recorded in 2019 was not deductible for purposes of calculating the tax provision and resulted in an income tax expense of $11.1 million in 2019, or a 5.4% decrease to the effective tax rate in 2020. Also, certain transaction and severance costs that Nexstar incurred in connection with its merger with Tribune in 2019 (See Note 3) were determined to be nondeductible for tax purposes. This resulted in an income tax expense of $6.0 million in 2019, or a 2.9% decrease to the effective tax rate in 2020.

 

The Company calculates its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year-to-date pre-tax income or loss and adjusts the provision for discrete tax items recorded in the period. Future changes in the forecasted annual income projections, including changes due to the impact of the COVID-19 pandemic, could result in significant adjustments to quarterly income tax expense in future periods.

 


28

As discussed in Note 2—Liquidity, the business disruption caused by COVID-19 had an adverse impact on the Company’s financial results mostly in the first part of the second quarter in 2020. This was followed by a significant improvement in the Company’s financial results in the remaining part of the second quarter and in the third quarter of 2020 as certain areas throughout the United States permitted the re-opening of non-essential businesses which has had a favorable impact to the macroeconomic environment and to the Company’s revenue. As of September 30, 2020, the Company also remained profitable. The Company considered the COVID-19 disruption in its ability to realize deferred tax assets in the future and determined that such conditions did not change its overall valuation allowance positions. The U.S. signed into law on March 27, 2020 the CARES Act which includes various income tax provisions to help stabilize U.S. businesses. The CARES Act includes provisions to ease the limitation on deductible interest expense for 2019 and 2020 and enhance the utilization of net operating losses generated in tax years 2018-2020. The Company is currently evaluating the tax implications resulting from the CARES Act and continues to monitor any new legislation passed in response to COVID-19 to measure the federal and state effects where it has an income tax presence.

 

Note 14:  FCC Regulatory Matters

 

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

 

The FCC has adopted rules with respect to the final conversion of existing low power and television translator stations to digital operation, which must be completed by July 2021.

 

Media Ownership

 

The FCC is required to review its media ownership rules every four years and to eliminate those rules it finds no longer serve the “public interest, convenience and necessity.”

 

In August 2016, the FCC adopted a Second Report and Order (the “2016 Ownership Order”) concluding the agency’s 2010 and 2014 quadrennial reviews. The 2016 Ownership Order (1) retained the local television ownership rule and radio/television cross-ownership rule with minor technical modifications, (2) extended the ban on common ownership of two top-four television stations in a market to network affiliation swaps, (3) retained the ban on newspaper/broadcast cross-ownership in local markets while considering waivers and providing an exception for failed or failing entities, (4) retained the dual network rule, (5) made television JSA relationships attributable interests and (6) defined a category of sharing agreements designated as SSAs between commercial television stations and required public disclosure of those SSAs (while not considering them attributable).

 

The 2016 Ownership Order reinstated a previously adopted rule that attributed another in-market station toward the local television ownership limits when one station owner sells more than 15% of the second station’s weekly advertising inventory under a JSA. Parties to JSAs entered into prior to March 31, 2014 were permitted to continue to operate under those JSAs until September 30, 2025.

 

 


29

Nexstar and other parties filed petitions seeking reconsideration of various aspects of the 2016 Ownership Order. On November 16, 2017, the FCC adopted an order (the “Reconsideration Order”) addressing the petitions for reconsideration. The Reconsideration Order (1) eliminated the rules prohibiting newspaper/broadcast cross-ownership and limiting television/radio cross-ownership, (2) eliminated the requirement that eight or more independently-owned television stations remain in a local market for common ownership of two television stations in that market to be permissible (the “eight voices test”), (3) retained the general prohibition on common ownership of two “top four” stations in a local market but provided for case-by-case review, (4) eliminated the television JSA attribution rule, and (5) retained the SSA definition and disclosure requirement for television stations. These rule modifications took effect on February 7, 2018, when the U.S. Court of Appeals for the Third Circuit (the “Third Circuit”) denied a mandamus petition which had sought to stay their effectiveness. On September 23, 2019, however, the Third Circuit issued an opinion vacating the Reconsideration Order on the ground that the FCC had failed to adequately analyze the effect of the Reconsideration Order’s deregulatory rule changes on minority and woman ownership of broadcast stations. The Third Circuit later denied petitions for en banc rehearing and its decision took effect on November 29, 2019. On December 20, 2019, the FCC issued an order reinstating the local television ownership rule, the radio/television cross-ownership rule, the newspaper/broadcast cross-ownership rule and the television JSA attribution rule as they existed prior to the Reconsideration Order (including the eight voices test with respect to local television ownership). On April 17, 2020, the FCC and a group of media industry stakeholders (including Nexstar) filed separate petitions for certiorari requesting that the U.S. Supreme Court review the Third Circuit’s decision. The Supreme Court granted certiorari on October 2, 2020. Oral argument and a decision in the case are expected to occur in 2021.

 

In December 2018, the FCC initiated its 2018 quadrennial review with the issuance of a Notice of Proposed Rulemaking.  Among other things, the FCC seeks comment on all aspects of the local television ownership rule’s implementation and whether the current version of the rule remains necessary in the public interest. Comments and reply comments in the 2018 quadrennial review were filed in the second quarter of 2019. As of September 30, 2020, the proceeding remains open.

 

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 a UHF station as reaching only 50% of a market’s percentage of total national audience. On August 24, 2016, the FCC adopted a Report and Order abolishing this “UHF discount,” and that rule change became effective in October 2016.  On April 20, 2017, the FCC adopted an order on reconsideration that reinstated the UHF discount, which became effective again on June 15, 2017. A federal court of appeals dismissed a petition for review of the discount’s reinstatement in July 2018. In December 2017, the FCC initiated a comprehensive rulemaking to evaluate the UHF discount together with the national ownership limit. Comments and reply comments were filed in 2018, and the proceeding remains open. Nexstar is in compliance with the 39% national cap limitation as calculated employing the UHF discount.

 

Spectrum

 

The FCC has repurposed a portion of the broadcast television spectrum for wireless broadband use.  Pursuant to federal legislation enacted in 2012, the FCC conducted an incentive auction in 2016-2017 for the purpose of making additional spectrum available to meet future wireless broadband needs. Under the auction statute and rules, certain television broadcasters accepted bids from the FCC to voluntarily relinquish their spectrum in exchange for consideration, and certain wireless broadband providers and other entities submitted successful bids to acquire the relinquished television spectrum. Television stations that did not relinquish their spectrum were “repacked” into the frequency band still remaining for television broadcast use. Ten of Nexstar’s stations and one station owned by Vaughan, a consolidated VIE, accepted bids to relinquish their spectrum. On July 21, 2017, the Company received $478.6 million of gross proceeds from the FCC related to the incentive auction. These were recorded as liability to surrender spectrum asset pending the relinquishment of spectrum assets or conversion from UHF to VHF. Of the 11 total stations that accepted bids, one station went off the air in November 2017. The associated spectrum asset and liability to surrender spectrum, both amounting to $34.6 million, were derecognized in the fourth quarter of 2017. The station that went off the air did not have a significant impact on the Company’s financial results because it was located in a remote rural area of the country and the Company has other stations which serve the same area. Of the remaining ten stations, eight ceased broadcasting on their previous channels and implemented channel sharing agreements. As a result, the associated spectrum asset and liability to surrender spectrum, both amounting to $314.1 million, were derecognized in the second quarter of 2018. Of the two remaining stations, one moved to a VHF channel in 2019 and vacated its former channel. As such, the associated spectrum asset and liability to surrender spectrum, both amounting to $52.0 million, were derecognized in 2019. The remaining station moved to a VHF channel in April 2020 and vacated its former channel. As such, the associated spectrum asset of $67.2 million and liability to surrender spectrum of $78.0 million were derecognized in the second quarter of 2020, resulting in a non-cash gain on relinquishment of spectrum of $10.8 million.

 

30

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 were assigned to new channels in the reduced post-auction television band. These “repack” stations have commenced operation on their new assigned channels and have ceased operating on their former channels. Congress has allocated up to an industry-wide total of $2.75 billion to reimburse television broadcasters, multichannel video programming distributors (“MVPDs”) and other parties for costs reasonably incurred due to the repack. These funds are not available to reimburse repacking costs for stations which surrendered their spectrum in exchange for consideration and entered into channel sharing relationships. Broadcasters, MVPDs and other parties have submitted to the FCC estimates of their reimbursable costs, followed by subsequent requests for reimbursement of those costs. As of September 29, 2020, verified cost estimates were approximately $2.18 billion, with additional reimbursements still to be made to repack stations as well as certain low power television and FM radio stations affected by the repack. As of October 7, 2020, the FCC reported that all repack stations had ceased operating on their former channel assignments. This includes all repack stations owned by Nexstar and its VIEs, although the Company will continue to incur costs to convert certain stations from interim to permanent facilities on their new channels. During the three and nine months ended September 30, 2020, the Company spent a total of $19.4 million and $49.3 million, respectively, in capital expenditures related to station repack which were recorded as assets under the property and equipment caption in the accompanying Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2019, the Company spent a total of $19.9 million and $56.3 million, respectively, in capital expenditures related to station repack which were recorded as assets under the property and equipment caption in the accompanying Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2020, the Company received $12.9 million and $51.3 million, respectively, in reimbursements from the FCC related to these expenditures which were recorded as operating income in the accompanying Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2019, the Company received $20.4 million and $54.0 million, respectively, in reimbursements from the FCC related to these expenditures which were recorded as operating income in the accompanying Condensed Consolidated Statements of Operations. The Company cannot yet determine if the FCC will be able to fully reimburse its repacking costs as this is dependent on certain factors, including the Company’s ability to incur repacking costs that are equal to or less than the FCC’s allocation of funds to the Company and whether the FCC will have available funds to reimburse the Company for additional repacking costs that it previously may not have anticipated. Whether the FCC will have available funds for additional reimbursements will also depend on the repacking costs that will be incurred by other broadcasters, MVPDs and other parties that are also seeking reimbursements.

 

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

 

Exclusivity/Retransmission Consent

 

On March 3, 2011, the FCC initiated a Notice of Proposed Rulemaking which among other things asked for comment on eliminating the network non-duplication and syndicated exclusivity protection rules, which may permit MVPDs to import out-of-market television stations in certain circumstances. In March 2014, the FCC adopted a further notice of proposed rulemaking which sought additional comment on the elimination or modification of the network non-duplication and syndicated exclusivity rules.  The FCC’s possible elimination or modification of the network non-duplication and syndicated exclusivity protection rules may affect the Company’s ability to sustain its current level of retransmission consent revenues or grow such revenues in the future and could have an adverse effect on the Company’s business, financial condition and results of operations. The Company cannot predict the resolution of the FCC’s network non-duplication and syndicated exclusivity proposals or the impact of these proposals if they are adopted.

 

On December 5, 2014, federal legislation directed the FCC to commence a rulemaking to “review its totality of the circumstances test for good faith [retransmission consent] negotiations.” The FCC commenced this proceeding in September 2015 and comments and reply comments were submitted. In July 2016, the then-Chairman of the FCC publicly announced that the agency would not adopt additional rules in this proceeding. However, the proceeding remains open.

 

Further, online video distributors (“OVDs”) have begun streaming broadcast programming over the Internet. In September 2014, the U.S. Supreme Court held that an OVD’s retransmissions of broadcast television signals without the consent of the broadcast station violate copyright holders’ exclusive right to perform their works publicly as provided under the Copyright Act. In December 2014, the FCC issued a Notice of Proposed Rulemaking proposing to interpret the term “MVPD” to encompass OVDs that make available for purchase multiple streams of video programming distributed at a prescheduled time and seeking comment on the effects of applying MVPD rules to such OVDs. Comments and reply comments were filed in 2015. Although the FCC has not classified OVDs as MVPDs to date, several OVDs have signed agreements for retransmission of local stations within their markets and others are actively seeking to negotiate such agreements.

31

Note 15:  Commitments and Contingencies

 

Guarantees of Mission and Shield Debt

 

Nexstar and its subsidiaries guarantee full payment of all obligations incurred under the Mission and Shield senior secured credit facilities. In the event that Mission or Shield is unable to repay amounts due, Nexstar will be obligated to repay such amounts. The maximum potential amount of future payments that Nexstar would be required to make under these guarantees would be generally limited to the borrowings outstanding. As of September 30, 2020, Mission had a maximum commitment of $250.0 million under its credit agreement, of which $225.0 million principal balance of debt was outstanding. As of the same date, Shield had used all of its commitment and had outstanding principal debt obligations of $21.0 million. Based on the terms of the credit agreements, Mission’s outstanding debt and Shield’s outstanding debt are due October 2023.

 

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

 

Local TV Advertising Antitrust Litigation—On March 16, 2018, a group of companies including Nexstar and Tribune (the “Defendants”) received a Civil Investigative Demand from the Antitrust Division of the DOJ regarding an investigation into the exchange of certain information related to the pacing of sales related to the same period in the prior year among broadcast stations in some DMAs in alleged violation of federal antitrust law. Without admitting any wrongdoing, some Defendants, including Tribune, entered into a proposed consent decree (referred to herein as the “consent decree”) with the DOJ on November 6, 2018. Without admitting any wrongdoing, Nexstar agreed to settle the matter with the DOJ on December 5, 2018. The consent decree was entered in final form by the U.S. District Court for the District of Columbia on May 22, 2019. The consent decree, which settles claims by the government of alleged violations of federal antitrust laws in connection with the alleged information sharing, does not include any financial penalty. Pursuant to the consent decree, Nexstar and Tribune agreed not to exchange certain non-public information with other stations operating in the same DMA except in certain cases, and to implement certain antitrust compliance measures and to monitor and report on compliance with the consent decree.

 

Starting in July 2018, a series of plaintiffs filed putative class action lawsuits against the Defendants and others alleging that they coordinated their pricing of television advertising, thereby harming a proposed class of all buyers of television advertising time from one or more of the Defendants since at least January 1, 2014. The plaintiff in each lawsuit seeks injunctive relief and money damages caused by the alleged antitrust violations. On October 9, 2018, these cases were consolidated in a multi-district litigation in the District Court for the Northern District of Illinois captioned In Re: Local TV Advertising Antitrust Litigation, No. 1:18-cv-06785 (“MDL Litigation”). On January 23, 2019, the Court in the MDL Litigation appointed plaintiffs’ lead and liaison counsel.

 

The MDL Litigation is ongoing. The Plaintiffs’ Consolidated Complaint was filed on April 3, 2019; Defendants filed a Motion to Dismiss on September 5, 2019. Before the Court ruled on that motion, the Plaintiffs filed their Second Amended Consolidated Complaint on September 9, 2019. This complaint added additional defendants and allegations. The Defendants filed a Motion to Dismiss and Strike on October 8, 2019. That motion is currently pending. Nexstar and Tribune deny the allegations against them and will defend their advertising practices.

 


32

Marshall Litigation—On April 3, 2019, Marshall filed a lawsuit against Nexstar in the Supreme Court of the State of New York (the “New York litigation”). The lawsuit initially asserted nine causes of action, five of which were subsequently dismissed by the Supreme Court, and one of which was withdrawn by Marshall. The remaining causes of action allege: (i) breach of the SSAs between Nexstar and Marshall; (ii) breach of the guaranty agreement between Nexstar and Marshall’s lenders; and (iii) conversion of certain retransmission fees collected by Nexstar on Marshall’s behalf. Marshall is seeking monetary and punitive damages, in addition to attorneys’ fees. Nexstar denies these allegations and intends to defend itself vigorously. On November 20, 2019, Nexstar filed counterclaims against Marshall and Pluria Marshall, in his individual capacity, alleging breach of the SSAs, unjust enrichment, and fraudulent conveyance. Nexstar seeks payment of the outstanding amount due under the SSAs as compensatory damages, punitive damages for the alleged fraudulent conveyances, and attorneys’ fees and costs.

 

On March 31, 2020, Marshall filed a bankruptcy adversary proceeding against Nexstar in the Southern District of Texas. This lawsuit arises in the context of the Marshall chapter 11 case and asserts many of the same causes of action that Marshall brought in the New York litigation, as well as turnover and fraudulent transfer claims. Marshall seeks monetary damages, punitive damages, and equitable relief, in addition to attorneys’ fees. Nexstar denies these allegations and intends to defend itself vigorously. Marshall filed a motion for partial summary judgment on its turnover claim. Nexstar moved for abstention, and in the alternative for dismissal and summary judgment, including a cross motion for summary judgment on Marshall’s turnover claim. On July 6, 2020, the bankruptcy court denied both parties’ partial motions for summary judgment on Marshall’s turnover claim. On August 13, 2020, the bankruptcy court denied the abstention motion, dismissed the claims that had previously been dismissed by the New York court (including the fraud claim) on the basis of comity, and set a discovery schedule culminating in a pretrial conference on February 1, 2021. Nexstar also filed a motion seeking authority from the bankruptcy court to bring fraudulent conveyance claims belonging to the estate against Pluria Marshall after the debtor refused to bring those claims itself. That motion has not yet been decided. Trial is expected to be scheduled for February 2021.

 

In late September 2020, the parties withdrew the New York appeal with prejudice and agreed to stay the litigation in the trial court until the conclusion of the Texas litigation.

 

On November 2, 2020, Nexstar and Marshall agreed to settle all claims between the parties. Accordingly, Nexstar agreed to pay and Marshall agreed to accept $2.25 million in cash consideration to settle all claims in full and with finality, subject to Marshall obtaining approval from the Bankruptcy Court of the Southern District of Texas. As of the filing of this Quarterly Report on Form 10-Q, Marshall has not received the required approval. If the Bankruptcy Court of the Southern District of Texas does not approve, the settlement between Nexstar and Marshall is terminated and void and Nexstar is not required to pay the cash consideration to Marshall, and the litigation will recommence.

 

In connection with the Merger (See Note 3), Nexstar assumed contingencies from certain legal proceedings, as follows:

 

Tribune Chapter 11 Reorganization and Confirmation Order Appeals—On December 8, 2008 (the “Petition Date”), Tribune and 110 of its direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 (“Chapter 11”) of title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On April 12, 2012, the Debtors, Oaktree Capital Management, L.P. (“Oaktree”), Angelo, Gordon & Co. L.P. (“AG”), the Official Committee of Unsecured Creditors (the “Creditors’ Committee”), and JPMorgan Chase Bank, N.A. (“JPMorgan” and, together with the Debtors, Oaktree, AG and the Creditors’ Committee, the “Plan Proponents”) filed the Fourth Amended Joint Plan of Reorganization for Tribune and its Subsidiaries with the Bankruptcy Court (as subsequently modified by the Plan Proponents, the “Plan”).

 

On July 23, 2012, the Bankruptcy Court issued an order confirming the Plan (the “Confirmation Order”). The Plan became effective and the Debtors emerged from Chapter 11 on December 31, 2012 (the “Effective Date”). The Bankruptcy Court has entered final decrees that have collectively closed 108 of the Debtors’ Chapter 11 cases. The remaining Debtors’ Chapter 11 proceedings continue to be jointly administered under the caption In re Tribune Media Company, et al., Case No. 08-13141.

 

Notices of appeal of the Bankruptcy Court’s order confirming the Plan (the “Confirmation Order”) were filed by (i) Aurelius Capital Management, LP, on behalf of its managed entities that were holders of the Predecessor’s senior notes and Exchangeable Subordinated Debentures due 2029 (“PHONES”); (ii) Law Debenture Trust Company of New York (n/k/a Delaware Trust Company) (“Delaware Trust Company”) and Deutsche Bank Trust Company Americas (“Deutsche Bank”), each successor trustees under the respective indentures for the Predecessor’s senior notes; (iii) Wilmington Trust Company, as successor indenture trustee for the PHONES; and (iv) EGI-TRB, L.L.C., a Delaware limited liability company wholly-owned by Sam Investment Trust (a trust established for the benefit of Samuel Zell and his family) (the “Zell Entity”). The appellants sought, among other relief, to overturn the Confirmation Order and certain prior orders of the Bankruptcy Court embodied in the Plan, including the settlement of certain claims and causes of action related to the Leveraged ESOP Transactions (as defined below) consummated by the Debtors, the Tribune employee stock ownership plan, the Zell Entity and Samuel Zell in 2007. The last of the appeals to be resolved were the appeals of Delaware Trust Company and Deutsche Bank. On August 26, 2020, the United States Court of Appeals for the Third Circuit issued an opinion affirming the order of the Bankruptcy Court confirming the Plan and the subsequent affirmation of the Bankruptcy Court’s confirmation order by the United States District Court for the District of Delaware.

33

 

As of the Effective Date, approximately 7,400 proofs of claim had been filed against the Debtors. Amounts and payment terms for these claims, if applicable, were established in the Plan. The Plan requires Tribune to reserve cash in amounts sufficient to make certain additional payments that may become due and owing pursuant to the Plan subsequent to the Effective Date. As of September 30, 2020, restricted cash and cash equivalents held by Tribune to satisfy the remaining claim obligations were $16.6 million and are estimated to be sufficient to satisfy such obligations.

 

As of September 30, 2020, all but 296 proofs of claim against the Debtors had been withdrawn, expunged, settled or otherwise satisfied. The majority of the remaining proofs of claim were filed by certain of Tribune’s former directors and officers, asserting indemnity and other related claims against Tribune for claims brought against them in lawsuits arising from the cancellation of all issued and outstanding shares of Tribune common stock as of December 20, 2007 and with Tribune becoming wholly-owned by the Tribune Company employee stock ownership plan (the “Leveraged ESOP Transactions”). Those lawsuits were brought in multidistrict litigation (“MDL”) before the U.S. District Court for the Southern District of New York in proceedings captioned In re Tribune Co. Fraudulent Conveyance Litigation, and are currently in various stages of appeal to the United States Court of Appeals for the Second Circuit. Under the Plan, the indemnity claims of Tribune’s former directors and officers must be set off against any recovery by the litigation trust formed pursuant to the Plan (the “Litigation Trust”) against any of those directors and officers, and the Litigation Trust is authorized to object to the allowance of any such indemnity-type claims.

 

The Debtors are continuing to evaluate the remaining proofs of claim. The ultimate amounts to be paid in resolutions of the remaining proofs of claim, including indemnity claims, continue to be subject to uncertainty. If the aggregate allowed amount of the remaining claims exceeds the restricted cash and cash equivalents held for satisfying such claims, Tribune would be required to satisfy the allowed claims from its cash on hand from operations.

 

Reorganization Items, Net—Reorganization items, net are included in the “Other expenses, net” in the Company’s unaudited Condensed Consolidated Statements of Operations and primarily include professional advisory fees and other costs related to the resolution of unresolved claims. Such amounts were not significant during the three and nine months ended September 30, 2020. The Company expects to continue to incur certain expenses pertaining to the Chapter 11 proceedings throughout 2020 and potentially in future periods.

 


34

Termination of Tribune and Sinclair Merger Agreement—On August 9, 2018, Tribune provided notification to Sinclair Broadcast Group, Inc. (“Sinclair”) that it terminated, effective immediately, the Agreement and Plan of Merger, dated May 8, 2017, with Sinclair, which provided for the acquisition by Sinclair of all of the outstanding shares of Tribune’s common stock. Additionally, on August 9, 2018, Tribune filed a complaint in the Delaware Court of Chancery against Sinclair, alleging that Sinclair willfully and materially breached its obligations under the merger agreement. The lawsuit sought damages for all losses incurred as a result of Sinclair’s breach of contract under the merger agreement.

 

On January 27, 2020, Nexstar and Sinclair agreed to settle the outstanding lawsuit between Tribune and Sinclair in connection with their terminated merger agreement. Tribune was acquired by Nexstar in September 2019. The companies will dismiss with prejudice the lawsuit pending in the Delaware Court of Chancery between Tribune and Sinclair concerning the terminated Tribune/Sinclair merger, and will release each other from any current and future claims relating to the terminated merger. Neither party has admitted any liability or wrongdoing in connection with the terminated merger. As such, both parties have settled the lawsuit to avoid the costs, distraction, and uncertainties of continued litigation. As part of the resolution, Sinclair agreed to sell to Nexstar television station WDKY-TV in the Lexington, KY DMA, subject to FCC approval and other customary conditions. On July 15, 2020, Sinclair and Nexstar formalized this proposed acquisition and entered into a definitive agreement for Nexstar to acquire the station for $18.0 million in cash, subject to working capital adjustments (See Note 3 for additional information). Nexstar’s acquisition of this station received FCC approval and closed in September 2020. In January 2020, Sinclair has also sold to Nexstar certain non-license assets associated with television station KGBT-TV in the Harlingen-Weslaco-Brownsville-McAllen, Texas market for $18.0 million in cash (See Note 3 for additional information). Nexstar and Sinclair have also modified an existing agreement regarding carriage of certain of Sinclair’s digital networks by stations acquired by Nexstar in connection with the Tribune acquisition. Finally, on January 28, 2020, Sinclair made a $98.0 million cash payment to Nexstar.

 

Chicago Cubs Transactions—On August 21, 2009, Tribune and Chicago Entertainment Ventures, LLC (formerly Chicago Baseball Holdings, LLC) (“CEV LLC”), and its subsidiaries (collectively, “New Cubs LLC”), among other parties, entered into an agreement (the “Cubs Formation Agreement”) governing the contribution of certain assets and liabilities related to the businesses of the Chicago Cubs Major League Baseball franchise then owned by Tribune and its subsidiaries to New Cubs LLC.  The transactions contemplated by the Cubs Formation Agreement and the related agreements thereto (the “Chicago Cubs Transactions”) closed on October 27, 2009. As a result of these transactions, Northside Entertainment Holdings LLC (f/k/a Ricketts Acquisition LLC) (“NEH”) owned 95% and Tribune owned 5% of the membership interests in CEV LLC. The fair market value of the contributed assets exceeded the tax basis and did not result in an immediate taxable gain as the transaction was structured to comply with the partnership provisions of the Internal Revenue Code (“IRC”) and related regulations.

 

On June 28, 2016, the Internal Revenue Service (“IRS”) issued Tribune a Notice of Deficiency which presented the IRS’s position that the gain should have been included in Tribune’s 2009 taxable income. Accordingly, the IRS has proposed a $182.0 million tax and a $73.0 million gross valuation misstatement penalty. In addition, after-tax interest on the aforementioned proposed tax and penalty through September 30, 2020 would be approximately $115.0 million. During the third quarter of 2016, Tribune filed a petition in the U.S. Tax Court (the “Tax Court”) to contest the IRS’s determination. A bench trial in the Tax Court took place between October 28, 2019 and November 8, 2019, and closing arguments took place on December 11, 2019. The Company has completed the Tax Court briefing process and expects an opinion on the merit to be issued in the fourth quarter of 2020. The Tax Court issued an opinion on January 6, 2020 holding that the IRS satisfied the procedural requirements for the imposition of the gross valuation misstatement penalty. The judge deferred any litigation of the penalty until the tax issue has been resolved by the Tax Court. If Tribune prevails on the tax issue, then there would be no penalty to litigate.

 

On January 22, 2019, Tribune sold its 5% membership interest in CEV LLC and paid the federal and state taxes due on the deferred gain and the gain on sale of its ownership of CEV LLC through its regular tax reporting process. The sale of Tribune’s ownership interest in CEV LLC has no impact on Tribune’s ongoing dispute with the IRS. On September 19, 2019, Tribune became a wholly owned subsidiary of Nexstar pursuant to the Merger Agreement. Nexstar continues to disagree with the IRS’s position that the Chicago Cubs Transactions generated a taxable gain in 2009, the proposed penalty and the IRS’s calculation of the gain. If the IRS prevails in its position, the gain on the Chicago Cubs Transactions would be deemed to be taxable in 2009. Nexstar estimates that the federal and state income taxes would be approximately $225.0 million before interest and penalties. Any tax, interest and penalty due will be offset by tax payments made relating to this transaction subsequent to 2009. Tribune made approximately $147.0 million of tax payments prior to its merger with Nexstar. In addition, if the IRS prevails with its position, under the tax rules for determining tax basis upon emergence from bankruptcy, the Company would be required to reduce its tax basis in certain assets. The reduction in tax basis would be required to reflect the reduction in the amount of the Company’s guarantee of the New Cubs partnership debt which was included in the reported tax basis previously determined upon emergence from bankruptcy. Tribune no longer owns any portion of CEV LLC. The Company has not recorded any tax reserves related to the Chicago Cubs Transactions.

 

 


35

Revenue Agent’s Report on Tribune’s 2014 to 2015 Federal Income Tax Audits—The Company files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. Prior to Nexstar’s merger with Tribune in September 2019, the Tribune entities were undergoing 2014 – 2015 Federal income tax audits. In the third quarter of 2020, the IRS completed its audits of the Tribune acquired entities, and with the exception of Tribune Media Company and Tribune Broadcasting Company II, LLC taxpayer entities, all other entity audits have been resolved and closed. For the Tribune entities pending completion of the IRS audits, the IRS issued a Revenue Agent's Report which disallows the reporting of certain assets and liabilities related to Tribune’s emergence from Chapter 11 bankruptcy on December 31, 2012. Nexstar disagrees with the IRS’s proposed adjustments to the tax basis of certain assets, and the related taxable income impact, and is contesting the adjustments through the IRS administrative appeals procedures. If the IRS prevails with its position, Nexstar would be required to reduce its tax basis in certain assets resulting in a $40.0 million increase in its federal and state taxes payable and a $140.0 million increase in deferred income tax liability as of September 30, 2020. In accordance with ASC Topic 740, the Company has appropriately reflected $11.0 million for certain contested issues in its liability for unrecognized tax benefits.

 

Note 16:  Segment Data

 

The Company evaluates the performance of its operating segments based on net revenue and operating income. The Company’s broadcast segment includes (i) television stations and related community focused websites that Nexstar owns, operates, programs or provides sales and other services to in various markets across the United States, (ii) digital multicast network services, (iii) WGN America, a national general entertainment cable network, and (iv) WGN-AM, a Chicago radio station. The other activities of the Company include (i) corporate functions, (ii) the management of certain real estate assets, including revenues from leasing certain owned office and production facilities, (iii) digital businesses and (iv) eliminations.

 

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

 

Three Months Ended September 30, 2020

 

Broadcast

 

 

Other

 

 

Consolidated

 

Net revenue

 

$

1,094,804

 

 

$

23,399

 

 

$

1,118,203

 

Depreciation

 

 

31,096

 

 

 

5,515

 

 

 

36,611

 

Amortization of intangible assets

 

 

68,591

 

 

 

674

 

 

 

69,265

 

Income (loss) from operations

 

 

377,172

 

 

 

(33,575

)

 

 

343,597

 

 

Nine Months Ended September 30, 2020

 

Broadcast

 

 

Other

 

 

Consolidated

 

Net revenue

 

$

3,060,279

 

 

$

64,379

 

 

$

3,124,658

 

Depreciation

 

 

91,187

 

 

 

16,600

 

 

 

107,787

 

Amortization of intangible assets

 

 

206,617

 

 

 

2,743

 

 

 

209,360

 

Income (loss) from operations

 

 

958,592

 

 

 

(113,727

)

 

 

844,865

 

 

Three Months Ended September 30, 2019

 

Broadcast

 

 

Other

 

 

Consolidated

 

Net revenue

 

$

637,148

 

 

$

26,427

 

 

$

663,575

 

Depreciation

 

 

26,538

 

 

 

2,825

 

 

 

29,363

 

Amortization of intangible assets

 

 

37,215

 

 

 

5,228

 

 

 

42,443

 

Income (loss) from operations

 

 

189,408

 

 

 

(67,793

)

 

 

121,615

 

 

Nine Months Ended September 30, 2019

 

Broadcast

 

 

Other

 

 

Consolidated

 

Net revenue

 

$

1,858,226

 

 

$

81,008

 

 

$

1,939,234

 

Depreciation

 

 

75,587

 

 

 

9,303

 

 

 

84,890

 

Amortization of intangible assets

 

 

98,830

 

 

 

16,708

 

 

 

115,538

 

Income (loss) from operations

 

 

550,001

 

 

 

(151,368

)

 

 

398,633

 

 

As of September 30, 2020

 

Broadcast

 

 

Other

 

 

Consolidated

 

Goodwill

 

$

2,861,314

 

 

$

-

 

 

$

2,861,314

 

Assets

 

 

12,169,206

 

 

 

1,121,296

 

 

 

13,290,502

 

 

As of December 31, 2019

 

Broadcast

 

 

Other

 

 

Consolidated

 

Goodwill

 

$

2,996,875

 

 

$

-

 

 

$

2,996,875

 

Assets

 

 

12,918,966

 

 

 

1,070,771

 

 

 

13,989,737

 

 

36

The following tables present the disaggregation of the Company’s revenue for the periods presented (in thousands):

 

Three Months Ended September 30, 2020

 

Broadcast

 

 

 

 

Other

 

 

Consolidated

 

Core advertising (local and national)

 

$

381,929

 

 

 

 

$

-

 

 

$

381,929

 

Political advertising

 

 

132,387

 

 

 

 

 

-

 

 

 

132,387

 

Distribution

 

 

538,271

 

 

 

 

 

105

 

 

 

538,376

 

Digital

 

 

33,488

 

 

 

 

 

21,743

 

 

 

55,231

 

Other

 

 

6,609

 

 

 

 

 

1,551

 

 

 

8,160

 

Trade

 

 

2,120

 

 

 

 

 

-

 

 

 

2,120

 

Total net revenue

 

$

1,094,804

 

 

 

 

$

23,399

 

 

$

1,118,203

 

 

Nine Months Ended September 30, 2020

 

Broadcast

 

 

Other

 

 

Consolidated

 

Core advertising (local and national)

 

$

1,097,509

 

 

$

39

 

 

$

1,097,548

 

Political advertising

 

 

209,294

 

 

 

-

 

 

 

209,294

 

Distribution

 

 

1,622,639

 

 

 

1,997

 

 

 

1,624,636

 

Digital

 

 

100,949

 

 

 

57,383

 

 

 

158,332

 

Other

 

 

22,015

 

 

 

4,960

 

 

 

26,975

 

Trade

 

 

7,873

 

 

 

-

 

 

 

7,873

 

Total net revenue

 

$

3,060,279

 

 

$

64,379

 

 

$

3,124,658

 

 

Three Months Ended September 30, 2019

 

Broadcast

 

 

 

 

Other

 

 

Consolidated

 

Core advertising (local and national)

 

$

290,213

 

 

 

 

$

-

 

 

$

290,213

 

Political advertising

 

 

10,899

 

 

 

 

 

-

 

 

 

10,899

 

Distribution

 

 

294,808

 

 

 

 

 

-

 

 

 

294,808

 

Digital

 

 

32,385

 

 

 

 

 

25,752

 

 

 

58,137

 

Other

 

 

4,995

 

 

 

 

 

675

 

 

 

5,670

 

Trade

 

 

3,848

 

 

 

 

 

-

 

 

 

3,848

 

Total net revenue

 

$

637,148

 

 

 

 

$

26,427

 

 

$

663,575

 

 

Nine Months Ended September 30, 2019

 

Broadcast

 

 

 

 

Other

 

 

Consolidated

 

Core advertising (local and national)

 

$

809,668

 

 

 

 

$

-

 

 

$

809,668

 

Political advertising

 

 

15,363

 

 

 

 

 

-

 

 

 

15,363

 

Distribution

 

 

923,050

 

 

 

 

 

-

 

 

 

923,050

 

Digital

 

 

86,906

 

 

 

 

 

80,303

 

 

 

167,209

 

Other

 

 

12,454

 

 

 

 

 

705

 

 

 

13,159

 

Trade

 

 

10,785

 

 

 

 

 

-

 

 

 

10,785

 

Total net revenue

 

$

1,858,226

 

 

 

 

$

81,008

 

 

$

1,939,234

 

 

The Company is a television broadcasting and digital media company focused on the acquisition, development and operation of television stations and interactive community websites and digital media services in medium-sized markets in the United States.

 

Advertising revenue (core, political and digital) is positively affected by national and regional political campaigns and certain events such as the Olympic Games or the Super Bowl. Company stations’ advertising revenue is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to, and including, the holiday season. In addition, advertising revenue is generally higher during even-numbered years when congressional and presidential elections occur and advertising is aired during the Olympic Games.

 

The Company receives compensation from MVPDs and OVDs in return for the consent to the retransmission of the signals of its television stations and the carriage of WGN America. Distribution revenue is recognized at the point in time the broadcast signal is delivered to the distributors and is based on a price per subscriber.

 

 


37

Note 17:  Subsequent Events

 

On October 1, 2020, Nexstar Broadcasting, Inc., a wholly-owned subsidiary of Nexstar, filed a Certificate of Amendment with the Secretary of State of Delaware to change its name to Nexstar Inc. In connection with this change, effective on November 1, 2020, Nexstar merged its two primary operating subsidiaries, Nexstar Inc. and Nexstar Digital, LLC, with Nexstar Inc. surviving the merger as the single operating subsidiary of Nexstar. Accordingly, the broadcasting, networks and digital businesses are now operating under the Nexstar Inc. umbrella.

 

On October 9, 2020, Nexstar contributed $34.8 million in cash to the Tribune qualified pension plans. Nexstar projects no additional cash contribution to its qualified pension plans during the remainder of 2020 (See Note 8).

           

On October 19, 2020, Nexstar acquired 2,927,522 shares in Series A Preferred Stock of VENN, a live 24/7 streaming network for gaming and entertainment based in Los Angeles, CA, for a total cash consideration of $7.0 million.

 

On October 21, 2020, Nexstar’s Board of Directors declared a quarterly cash dividend of $0.56 per share of its Class A common stock. The dividend is payable on November 20, 2020 to stockholders of record on November 6, 2020.

 

On October 30, 2020, Nexstar prepaid $300.0 million of the outstanding principal balance under its term loans, funded by cash on hand.

38

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019.

As used in this Quarterly Report on Form 10-Q and unless the context indicates otherwise, “Nexstar” refers to Nexstar Media Group, Inc. and its consolidated subsidiaries; “Nexstar Broadcasting” refers to Nexstar Broadcasting, Inc., our wholly-owned direct subsidiary and which on October 1, 2020 was renamed Nexstar Inc.; “Nexstar Digital” refers to Nexstar Digital LLC, our wholly-owned direct subsidiary; the “Company” refers to Nexstar and the variable interest entities (“VIE”) required to be consolidated in our financial statements; and all references to “we,” “our,” “ours,” and “us” refer to Nexstar.

As a result of our deemed controlling financial interests in the consolidated VIEs in accordance with U.S. GAAP, we consolidate their financial position, results of operations and cash flows as if they were wholly-owned entities. We believe this presentation is meaningful for understanding our financial performance. Refer to Note 2 to our Condensed Consolidated Financial Statements for a discussion of our determinations of VIE consolidation under the related authoritative guidance. Therefore, the following discussion of our financial position and results of operations includes the consolidated VIEs’ financial position and results of operations.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including: the risks and uncertainties related to the global COVID-19 pandemic, including, for example, expectations regarding the impact of COVID-19 on our businesses and our future financial performance; our ability to obtain financial and tax benefits from the recently-passed Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”); any projections or expectations of earnings, revenue, financial performance, liquidity and capital resources or other financial items; the impact of pending or future litigation; the effects of governmental regulation and future regulation on broadcasting; competition from others in our broadcast television markets; volatility in programming costs; any assumptions or projections about the television broadcasting industry; any statements of our plans, strategies and objectives for our future operations, performance, liquidity and capital resources or other financial items; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and other similar words. Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ from a projection or assumption in any of our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements, are subject to change and the inherent risks and uncertainties, including those described in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements made in this Quarterly Report on Form 10-Q are made only as of the date hereof, and we do not have or undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances.


39

Executive Summary

 

2020 Highlights

 

 

•

During the third quarter of 2020, net revenue increased by $454.6 million, or 68.5% compared to the same period in 2019. The increase was primarily due to the incremental revenue from acquisitions of $367.7 million and an increase in distribution revenue and political advertising revenue of our legacy stations of $87.3 million and $77.9 million, respectively. These increases were partially offset by a decrease in revenue from core advertising of legacy stations of $35.3 million, primarily due to the business disruptions caused by COVID-19 and change in the mix between core and political advertising as 2020 is an election year, a decrease in net revenue from station divestitures of $27.4 million and a $7.3 million net decrease in digital revenue of our digital businesses and legacy stations primarily due to the combined effect of business disruptions caused by COVID-19 and realigned digital business operations. Our deconsolidation of Marshall decreased the Company’s revenue by $4.6 million but also decreased the Company’s operating expenses by $5.3 million.

 

 

•

On September 1, 2020, our Board of Directors approved an additional $300 million in our share repurchase authorization to repurchase our Class A common stock. During the three and nine months ended September 30, 2020, we repurchased a total of 1,300,000 shares and 2,250,000 shares of our Class A common stock for $125.0 million and $197.6 million, respectively, funded by cash on hand. As of September 30, 2020, the remaining available amount under our share repurchase authorization was $259.2 million, net of all repurchases made.

 

 

•

During the three and nine months ended September 30, 2020, we received a total of $9.9 million and $207.0 in million cash distributions, respectively, from our 31.3% equity method investment in TV Food Network.

 

 

•

For each of the first three quarters of 2020, our Board of Directors declared and paid cash dividends of $0.56 per share of our outstanding Class A common stock, or total dividend payments of $76.4 million.

 

 

•

On October 1, 2020, Nexstar Broadcasting filed a Certificate of Amendment with the Secretary of State of Delaware to change its name to Nexstar Inc. In connection with this change, effective on November 1, 2020, Nexstar merged its two primary operating subsidiaries, Nexstar Inc. and Nexstar Digital, LLC, with Nexstar Inc. surviving the merger as the single operating subsidiary of Nexstar. Accordingly, the broadcasting, networks and digital businesses are now operating under the Nexstar Inc. umbrella.

 

2020 Acquisitions

 

On January 27, 2020, we acquired certain non-license assets associated with television station KGBT-TV in the Harlingen-Weslaco-Brownsville-McAllen, Texas market from Sinclair Broadcasting Group Inc. (“Sinclair”) for $17.9 million in cash.

 

On March 2, 2020, we completed our acquisition of Fox affiliate television station WJZY and MyNetworkTV affiliate television station WMYT in the Charlotte, NC market from Fox Television Stations, LLC (“Fox”) for $45.3 million in cash. The acquisition from Fox allowed us entry into the Charlotte, NC market.

 

On September 1, 2020, Mission Broadcasting, Inc. (“Mission”), one of our consolidated VIEs, completed the acquisition of certain assets of the three television stations formerly owned by Marshall Broadcasting Group, Inc. (“Marshall”): KMSS serving the Shreveport, Louisiana market, KPEJ serving the Odessa, Texas market and KLJB serving the Quad Cities, Iowa/Illinois market which allowed it entrance into these markets. The purchase price for the acquisition was $53.2 million, of which $49.0 million was applied against Mission’s existing loans receivable from Marshall on a dollar-for-dollar basis and the remaining $4.2 million in cash was funded by cash on hand.

 

On September 17, 2020, we completed the acquisition of WDKY-TV, the Fox affiliate in the Lexington, KY market, from Sinclair for $18.0 million in cash, funded by cash on hand. The acquisition from Sinclair allowed us entry in the Lexington KY market.

 


40

2020 Dispositions

 

On January 14, 2020, we sold our sports betting information website business to Star Enterprises Ltd., a subsidiary of Alto Holdings, Ltd., for a net consideration of $12.9 million (net of $2.4 million cash balance of this business that was transferred to the buyer upon sale).

 

On March 2, 2020, we completed the sale of Fox affiliate television station KCPQ and MyNetworkTV affiliate television station KZJO in the Seattle, WA market, as well as Fox affiliate television station WITI in the Milwaukee, WI market, to Fox for approximately $349.9 million in cash, including working capital adjustments. Our proceeds from the sale of the stations were partially used to prepay our term loans.

 

Future Acquisitions

 

On July 8, 2020, Nexstar assigned to Mission its option to purchase CW affiliated station WPIX in the New York, NY market from Scripps. On the same date, Mission notified Scripps of its exercise of the option for a purchase price of $75.0 million, subject to customary adjustments, plus accrued interest pursuant to the option agreement. On August 28, 2020, Mission signed a purchase agreement to acquire WPIX. The acquisition is subject to FCC approval and other customary conditions and Mission expects it to close at the end of 2020. Mission expects to fund this acquisition through a new borrowing that is to be guaranteed by Nexstar. Upon Mission’s acquisition of WPIX, Nexstar intends to enter into a local service agreement and option agreement. Nexstar previously acquired WPIX through a merger with Tribune but simultaneously sold the station to Scripps on September 19, 2019. Under Nexstar’s sale agreement with Scripps, Nexstar was granted an assignable option to purchase the station.

 

On August 7, 2020, Nexstar assigned to Mission its option to purchase the assets of WNAC, the Fox affiliated full power television station serving the Providence, Rhode Island market, from WNAC, LLC. On the same date, Mission entered into an Assignment and Assumption Agreement with Nexstar and notified WNAC, LLC of its exercise of the option. The purchase price is equal to a base purchase price, plus an escalation amount per day from the date of the option agreement until the completion of the acquisition, minus a credit for an outstanding loan (all defined in the option agreement). Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition has received FCC approval and Mission expects it to close in the fourth quarter of 2020. Nexstar currently provides services to WNAC under an LMA which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase WNAC from Mission.

 

On August 7, 2020, Nexstar also assigned to Mission its option to purchase KASY, KWBQ and KRWB from Tamer. KASY (MNTV affiliated), KWBQ (CW affiliated) and KRWB (CW affiliated) are full power television stations serving the Albuquerque, New Mexico market. On the same date, Mission entered into an Assignment and Assumption Agreement with Nexstar and notified Tamer of its exercise of the option. The purchase price is equal to a base purchase price, plus an escalation amount per year from the date of the option agreement until completion of the acquisition, minus a fixed monthly credit from the date of the option agreement until completion of the acquisition (all defined in the option agreement). Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition has received FCC approval and Mission expects it to close in the fourth quarter 2020. Nexstar currently provides services to these stations under an SSA which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase the stations from Mission.

 

On August 10, 2020, Nexstar assigned to Mission its options to purchase WXXA-TV, the Fox affiliate in the Albany, NY market, and WLAJ-TV, the ABC affiliate in the Lansing, MI market, from Shield (“Shield Stations”). On the same date, Mission entered into an Assignment and Assumption agreement with Nexstar and notified Shield of its exercise of the options to purchase the stations. The purchase price of these stations was $20.8 million. Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition of the Shield Stations has received FCC consent and Mission expects to close it in the fourth quarter of 2020. Nexstar currently provides services to the Shield Stations under JSAs and SSAs which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase the stations from Mission.

 

 


41

Debt Transactions

 

 

•

During the nine months ended September 30, 2020, we prepaid a total of $480.0 million in principal balance under our term loans, funded by cash on hand. We also made an additional prepayment of $200.0 million in principal balance of term loans pursuant to the mandatory prepayment requirement of the amended credit agreement of Nexstar Broadcasting. The mandatory prepayment resulted from the disposition of certain television station assets in the Seattle, WA and Milwaukee, WI markets to Fox.

 

 

•

During the nine months ended September 30, 2020, we repaid scheduled principal maturities of $53.3 million under our term loans.

 

 

•

On September 3, 2020, Nexstar and Mission amended their respective credit agreements. The amendments provide for a new senior secured first lien revolving credit facility (the “2020 Revolving Facility”) in an aggregate principal amount of $280.0 million, of which $30.0 million was initially allocated to Nexstar and $250.0 million was initially allocated to Mission. This is in addition to the $139.7 million and $3.0 million unused revolving credit facilities under Nexstar Broadcasting and Mission’s existing credit agreements, respectively.

 

 

•

On September 3, 2020, Mission reallocated its $3.0 million available capacity under its existing revolving credit facility to Nexstar. Mission also drew upon $225.0 million under the 2020 Revolving Facility and used the proceeds to repay in full its outstanding principal balance under its term B loan amounting to $224.5 million.

 

 

•

On September 25, 2020, Nexstar Broadcasting issued $1.0 billion 4.75% senior unsecured notes due 2028 at par (“4.75% Notes due 2028”). The net proceeds from the issuance were used to redeem the $900.0 million 5.625% senior unsecured notes due 2024 “(5.625% Notes due 2024”) in full and pay related premiums equal to 102.813% of the principal amount, accrued interest and fees and expenses. The remainder of the proceeds was used for general corporate purposes.

 

Impact of COVID-19 Pandemic

 

In March 2020, the World Health Organization declared the outbreak of Coronavirus Disease (“COVID-19”) a pandemic and the President of the United States declared the COVID-19 pandemic a national emergency. The virus continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration, severity and containment measures, our compliance and the measures we have taken around the pandemic situation have impacted our day-to-day operations and disrupted our business and operations, as well as those of our key business partners, affiliates, vendors and other counterparties, and will continue to do so for an indefinite period of time. To support the health and well-being of our employees, business partners and communities, a vast majority of our employees worked remotely since mid-March 2020 until the end of April 2020 when we partially resumed our normal onsite workplace setting. On May 1, 2020, the shelter-in-place orders in the state of Texas were lifted and we fully resumed our normal corporate workplace setting, subject to continuous monitoring.

 


42

The disruptions caused by COVID-19 had an adverse impact on our business and our financial results mostly in the first part of the second quarter in 2020. This was followed by a significant improvement in our financial results in the remaining part of the second quarter and in the third quarter of 2020 as certain areas throughout the United States permitted the re-opening of non-essential businesses which has had a favorable impact to the macroeconomic environment and to the Company’s revenue. As of September 30, 2020, we remained profitable. Our current year results were also higher than our prior year results primarily due to contribution from our acquisition of Tribune in September 2019 and revenue from political advertising in 2020. As of September 30, 2020, there have been no material changes in our customer mix, including our advertisers, multichannel video programming distributors and online video distributors. The disruptions from COVID-19 did not have a material impact on our liquidity. As of September 30, 2020, our unrestricted cash on hand and positive working capital were $409.9 million and $669.5 million, respectively, both of which increased from our December 31, 2019 levels of $232.1 million and $404.2 million, respectively. We continue to generate operating cash flows and we believe we have sufficient unrestricted cash on hand and have the availability to access additional cash up to $172.7 million and $25.0 million under the respective Nexstar and Mission revolving credit facilities (with a maturity date of October 2023) to meet our business operating requirements, our capital expenditures and to continue to service our debt for at least the next 12 months as of the filing date of this Quarterly Report on Form 10-Q. We currently estimate that overall revenue and operating results for the remainder of fiscal 2020 will be lower than initially anticipated at the beginning of fiscal 2020, despite that 2020 is an election year. The full extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity and impact of the COVID-19 pandemic, and any additional preventative and protective actions that the U.S. government, or the Company, may direct, which may result in an extended period of continued business disruption. Further financial impact cannot be reasonably estimated at this time but may continue to have a material impact on our business and results of operations and may also have a material impact on our financial condition and liquidity. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business in future periods.

 

The CARES Act

 

On March 27, 2020, the CARES Act was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies affected by the COVID-19 pandemic and their employees. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, deferral of contributions to qualified pension plans and other postretirement benefit plans, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. We elected not to defer the remaining cash contribution requirements to our qualified pension plans under the CARES Act. We intend to continue to review and consider any available potential benefits under the CARES Act for which we qualify, including those described above. The U.S. government or any other governmental authority that agrees to provide such aid under the CARES Act or any other crisis relief assistance may impose certain requirements on the recipients of the aid, including restrictions on executive officer compensation, dividends, prepayment of debt, limitations on debt and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full. The CARES Act is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.

 


43

Overview of Operations

As of September 30, 2020, we owned, operated, programmed or provided sales and other services to 197 full power television stations, including those owned by VIEs, and one AM radio station in 115 markets in 39 states and the District of Columbia. The stations are affiliates of ABC, NBC, FOX, CBS, The CW, MNTV and other broadcast television networks. Through various local service agreements, we provided sales, programming and other services to 36 full power television stations owned by independent third parties, of which 35 full power television stations are VIEs that are consolidated into our financial statements. See Note 2, “Variable Interest Entities” to our unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a discussion of the local service agreements we have with these independent third parties.

We guarantee full payment of all obligations incurred under Mission’s and Shield’s senior secured credit facilities in the event of their default. Mission is a guarantor of our senior secured credit facility, our 4.75% Notes due 2028 and our 5.625% Notes due 2027. Shield does not guarantee any debt within the group. In consideration of our guarantee of Mission’s senior secured credit facility, Mission has granted us purchase options, exclusive of stations in the Shreveport, Louisiana, Odessa, Texas and Quad Cities, Iowa/Illinois markets, to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. These option agreements, which expire on various dates between 2021 and 2028, are freely exercisable or assignable by us without consent or approval by Mission or its shareholders. We expect these option agreements to be renewed upon expiration.

 

We do not own the consolidated VIEs or their television stations. However, we are deemed under U.S. GAAP to have controlling financial interests in these entities because of (1) the local service agreements Nexstar has with their stations, (2) our guarantees of the obligations incurred under Mission’s and Shield’s senior secured credit facilities, (3) our power over significant activities affecting these VIEs’ economic performance, including budgeting for advertising revenue and, in some cases, advertising sales and hiring and firing of sales force personnel and (4) purchase options granted by each such VIE, exclusive of Mission stations in the Shreveport, Louisiana, Odessa, Texas and Quad Cities, Iowa/Illinois markets, which permit Nexstar to acquire the assets and assume the liabilities of each of these VIEs’ stations at any time, subject to FCC consent. In compliance with FCC regulations for all the parties, each of the consolidated VIEs maintains complete responsibility for and control over programming, finances and personnel for its stations.

In December 2019, Marshall, a VIE previously consolidated by us and the owner of three television stations, filed a voluntary petition for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas. Effective on December 6, 2019, the bankruptcy court ordered the cancellation of certain contracts between us and Marshall, including the JSAs. As a result of these developments, we evaluated our business arrangements with Marshall and determined that we no longer had the power to direct the most significant economic activities of the entity and thus we no longer met the accounting criteria for a controlling financial interest in the entity.  Thus, we deconsolidated Marshall’s assets, liabilities and equity effective in December 2019.

On March 30, 2020, Mission, a VIE consolidated by Nexstar, entered into an asset purchase agreement to acquire certain assets of the three television stations previously owned by Marshall: KMSS serving the Shreveport, Louisiana market, KPEJ serving the Odessa, Texas market and KLJB serving the Quad Cities, Iowa/Illinois market. On April 1, 2020, the acquisition was approved by the Bankruptcy Court for the Southern District of Texas. On September 1, 2020, Mission completed this acquisition which allowed it entrance into these markets. (See “Executive Summary—2020 Acquisitions” above for additional information). Upon closing of the acquisition, the SSAs between Nexstar and Marshall were terminated. On September 1, 2020, Mission entered new SSAs with Nexstar for the stations it acquired from Marshall.

See Note 2, “Variable Interest Entities” to our unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for additional information on VIEs.

 


44

Regulatory Developments

As a television broadcaster, the Company is highly regulated, and its operations require that it retain or renew a variety of government approvals and comply with changing federal regulations. In 2016, the FCC reinstated a previously adopted rule providing that a television station licensee which sells more than 15 percent of the weekly advertising inventory of another television station in the same DMA under a JSA is deemed to have an attributable ownership interest in that station.  Parties to existing JSAs that were deemed attributable interests and did not comply with the FCC’s local television ownership rule were given until September 30, 2025 to come into compliance. In November 2017, the FCC adopted an order on reconsideration that eliminated the rule. That elimination became effective on February 7, 2018. On September 23, 2019, a federal court of appeals vacated the FCC’s November 2017 order on reconsideration. The court later denied petitions for en banc rehearing; on November 29, 2019 its decision became effective; and on December 20, 2019 the FCC issued an order that formally reinstated the rule. The court’s decision has been appealed to the U.S. Supreme Court, which has granted certiorari and will review the decision. If the Company is ultimately required to amend or terminate its existing JSAs, the Company could have a reduction in revenue and increased costs if it is unable to successfully implement alternative arrangements that are as beneficial as the existing JSAs.

The FCC has repurposed a portion of the broadcast television spectrum for wireless broadband use. In an incentive auction which concluded in April 2017, certain television broadcasters accepted bids from the FCC to voluntarily relinquish their spectrum in exchange for consideration. Television stations that did not relinquish their spectrum were “repacked” into the frequency band still remaining for television broadcast use. In July 2017, the Company received $478.6 million in gross proceeds from the FCC for eight stations that now share a channel with another station, one station that moved to a VHF channel in 2019, one station that moved to a VHF channel in April 2020 and one that went off the air in November 2017. The station that went off the air did not have a significant impact on our financial results because it was located in a remote rural area of the country and the Company has other stations which serve the same area.

Sixty-one (61) full power stations owned by Nexstar and 17 full power stations owned by VIEs were assigned to new channels in the reduced post-auction television band. All of these stations have ceased operating on their former channels and are operating on their new assigned channels, although the Company will continue to incur costs to convert certain stations from interim to permanent facilities on their new channels. Congress has allocated up to an industry-wide total of $2.75 billion to reimburse television broadcasters, MVPDs and other parties for costs reasonably incurred due to the repack. During the three and nine months ended September 30, 2020, the Company spent a total of $19.4 million and $49.3 million, respectively, in capital expenditures related to station repack which were recorded as assets under the property and equipment caption in the accompanying Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2019, the Company spent a total of $19.9 million and $56.3 million, respectively, in capital expenditures related to station repack which were recorded as assets under the property and equipment caption in the accompanying Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2020, the Company received $12.9 million and $51.3 million, respectively, in reimbursements from the FCC related to these expenditures which were recorded as operating income in the accompanying Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2019, the Company received $20.4 million and $54.0 million, respectively, in reimbursements from the FCC related to these expenditures which were recorded as operating income in the accompanying Condensed Consolidated Statements of Operations. As of September 30, 2020, approximately $36.8 million of estimated remaining costs in connection with the station repack are expected to be incurred by the Company, some or all of which will be reimbursable. If the FCC fails to fully reimburse the Company’s repacking costs, the Company could have increased costs related to the repack.

Seasonality

Advertising revenue is positively affected by national and regional political election campaigns and certain events such as the Olympic Games or the Super Bowl. Advertising revenue is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to, and including, the holiday season. In addition, advertising revenue is generally higher during even-numbered years, when state, congressional and presidential elections occur and when advertising airs during the Olympic Games. As 2020 is an election year, we generally expect an increase in political advertising revenue in 2020 compared to 2019. However, due to business disruptions caused by COVID-19, our revenue from political advertising may be less than we initially anticipated at the beginning of 2020 but the ultimate outcome is unknown at this time. Additionally, the rescheduling of the 2020 Summer Olympics to 2021, also due to the COVID-19 pandemic situation, decreased our advertising revenue in 2020 but is expected to increase our advertising revenue in 2021 if the Summer Olympics are to occur when scheduled.

45

Historical Performance

Revenue

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Core advertising

 

$

381,929

 

 

 

34.1

 

 

$

290,213

 

 

 

43.7

 

 

$

1,097,548

 

 

 

35.1

 

 

$

809,668

 

 

 

41.7

 

Political advertising

 

 

132,387

 

 

 

11.8

 

 

 

10,899

 

 

 

1.6

 

 

 

209,294

 

 

 

6.7

 

 

 

15,363

 

 

 

0.8

 

Distribution revenue

 

 

538,376

 

 

 

48.1

 

 

 

294,808

 

 

 

44.4

 

 

 

1,624,636

 

 

 

52.0

 

 

 

923,050

 

 

 

47.6

 

Digital

 

 

55,231

 

 

 

4.9

 

 

 

58,137

 

 

 

8.8

 

 

 

158,332

 

 

 

5.1

 

 

 

167,209

 

 

 

8.6

 

Other

 

 

8,160

 

 

 

0.9

 

 

 

5,670

 

 

 

0.9

 

 

 

26,975

 

 

 

0.8

 

 

 

13,159

 

 

 

0.7

 

Trade revenue

 

 

2,120

 

 

 

0.2

 

 

 

3,848

 

 

 

0.6

 

 

 

7,873

 

 

 

0.3

 

 

 

10,785

 

 

 

0.6

 

Total net revenue

 

$

1,118,203

 

 

 

100.0

 

 

$

663,575

 

 

 

100.0

 

 

$

3,124,658

 

 

 

100.0

 

 

$

1,939,234

 

 

 

100.0

 

 

Results of Operations

The following table sets forth a summary of the Company’s operations (in thousands) and each component of operating expense as a percentage of net revenue:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Net revenue

 

$

1,118,203

 

 

 

100.0

 

 

$

663,575

 

 

 

100.0

 

 

$

3,124,658

 

 

 

100.0

 

 

$

1,939,234

 

 

 

100.0

 

 

Operating expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

39,699

 

 

 

3.6

 

 

 

63,252

 

 

 

9.5

 

 

 

128,572

 

 

 

4.1

 

 

 

125,838

 

 

 

6.5

 

 

Direct operating expenses,

  net of trade

 

 

420,929

 

 

 

37.6

 

 

 

318,043

 

 

 

47.9

 

 

 

1,276,452

 

 

 

40.9

 

 

 

899,637

 

 

 

46.4

 

 

Selling, general and administrative expenses, excluding corporate

 

 

186,845

 

 

 

16.7

 

 

 

119,831

 

 

 

18.1

 

 

 

509,599

 

 

 

16.3

 

 

 

343,663

 

 

 

17.7

 

 

Depreciation

 

 

36,611

 

 

 

3.3

 

 

 

29,363

 

 

 

4.4

 

 

 

107,787

 

 

 

3.4

 

 

 

84,890

 

 

 

4.4

 

 

Amortization of intangible assets

 

 

69,265

 

 

 

6.2

 

 

 

42,443

 

 

 

6.4

 

 

 

209,360

 

 

 

6.7

 

 

 

115,538

 

 

 

6.0

 

 

Amortization of broadcast rights

 

 

31,968

 

 

 

2.9

 

 

 

18,452

 

 

 

3.0

 

 

 

104,916

 

 

 

3.3

 

 

 

46,749

 

 

 

2.3

 

 

Trade expense

 

 

2,162

 

 

 

0.2

 

 

 

4,284

 

 

 

0.6

 

 

 

8,337

 

 

 

0.3

 

 

 

11,597

 

 

 

0.6

 

 

Reimbursement from the FCC related to station repack

 

 

(12,873

)

 

 

(1.2

)

 

 

(20,417

)

 

 

(3.1

)

 

 

(51,347

)

 

 

(1.6

)

 

 

(54,020

)

 

 

(2.8

)

 

Goodwill and intangible assets impairment

 

 

-

 

 

 

-

 

 

 

63,317

 

 

 

9.5

 

 

 

-

 

 

 

-

 

 

 

63,317

 

 

 

3.3

 

 

Change in the estimated fair value of contingent consideration attributable to a merger

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,933

 

 

 

0.1

 

 

 

-

 

 

 

-

 

 

Gain on relinquishment of spectrum

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10,791

)

 

 

(0.3

)

 

 

-

 

 

 

-

 

 

Loss (gain) on disposal of stations and entities, net

 

 

-

 

 

 

-

 

 

 

(96,608

)

 

 

(14.6

)

 

 

(7,025

)

 

 

(0.2

)

 

 

(96,608

)

 

 

(5.0

)

 

Total operating expenses

 

 

774,606

 

 

 

 

 

 

 

541,960

 

 

 

 

 

 

 

2,279,793

 

 

 

 

 

 

 

1,540,601

 

 

 

 

 

 

Income from operations

 

$

343,597

 

 

 

 

 

 

$

121,615

 

 

 

 

 

 

$

844,865

 

 

 

 

 

 

$

398,633

 

 

 

 

 

 

46

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

 

The period-to-period comparability of our consolidated operating results is affected by acquisitions. For each quarter we present, our legacy stations include those stations that we owned or provided services to for the complete quarter in the current and prior years. For our annual and year to date presentations, we combine the legacy stations’ amounts presented in each quarter.

 

Revenue

 

Core advertising revenue was $382.0 million for the three months ended September 30, 2020, compared to $290.2 million for the same period in 2019, an increase of $91.8 million, or 31.6%. The increase was primarily due to incremental revenue from Tribune stations of $135.4 million and current year station acquisitions of $5.9 million, partially offset by a decrease in revenue from station divestitures of $12.4 million. Our legacy stations’ core advertising revenue decreased by $35.3 million, primarily due to the business disruptions caused by COVID-19 and changes in the mix between our core and political advertising. Our deconsolidation of Marshall in December 2019 also resulted in a $1.8 million decrease in revenue. Our largest advertiser category, automobile, represented approximately 18% and 23% of our core advertising revenue for the three months ended September 30, 2020 and 2019, respectively. Overall, including past results of our newly acquired stations, automobile revenues decreased by approximately 34% during the quarter. The other categories representing our top five were medical/healthcare and home repair/manufacturing, which increased in 2020, attorneys, which decreased in 2020, and insurance which remained flat. We currently estimate that overall core advertising revenue for the remainder of fiscal 2020 will continue to be negatively impacted by the business disruptions caused by COVID-19. The full extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that the U.S. government, we, or our business partners, may direct, which may result in an extended period of continued business disruption. Further financial impact cannot be reasonably estimated at this time but may continue to have a material impact on our core advertising revenue and our overall results of operations. Additionally, the rescheduling of the summer Olympics to 2021, also due to the COVID-19 pandemic situation, decreased our advertising revenue in 2020 but is expected to increase our advertising revenue in 2021.

Political advertising revenue was $132.4 million for the three months ended September 30, 2020, compared to $10.9 million for the same period in 2019, an increase of $121.5 million as 2020 is an election year. Of the $121.5 million increase, $39.4 million was attributable to incremental revenue from Tribune stations we acquired in 2019, $4.9 million was attributable to current year station acquisitions, and $77.9 million was attributable to our legacy stations. We expect an increase in political advertising revenue in 2020 compared to 2019.

Distribution revenue was $538.4 million for the three months ended September 30, 2020, compared to $294.8 million for the same period in 2019, an increase of $243.6 million, or 82.6%. The increase was primarily due to incremental revenue in 2020 from Tribune acquisition in September 2019 of $160.5 million and current year station acquisitions of $12.9 million, partially offset by a decrease in revenue from station divestitures and deconsolidation of Marshall of $12.8 million and $4.3 million, respectively. Our legacy stations’ revenue increased by $87.3 million primarily due to the combined effect of scheduled annual escalation of rates per subscriber, renewals of contracts providing for higher rates per subscriber (contracts generally have a three-year term), contributions from distribution agreements with OVDs and increase in revenue in 2020 resulting from the temporary disruption of distribution agreements with AT&T/DirecTV from July 2, 2019 to August 29, 2019. We anticipate continued increase of retransmission fees until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.

Digital media revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $55.2 million for the three months ended September 30, 2020, compared to $58.1 million for the same period in 2019, a decrease of $2.9 million, or 5.0%. Our digital businesses’ revenue decreased by $4.0 million primarily due to the business disruption caused by COVID-19 and realigned digital business operations. Our legacy stations’ revenue from web and mobile sites also decreased by $3.2 million primarily due to the business disruption caused by COVID-19. These decreases were partially offset by incremental revenue from Tribune stations we acquired in 2019 of $5.5 million, less a decrease in revenue from station divestitures of $1.3 million.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of our stations, were $39.7 million for the three months ended September 30, 2020, compared to $63.3 million for the same period in 2019, a decrease of $23.6 million, or 37.2%. This was primarily attributable to a decrease in severance and payroll-related costs, audit, legal and professional fees and stock-based compensation associated with our acquisition of Tribune in 2019.


47

Station direct operating expenses, consisting primarily of news, engineering, programming and station selling, general and administrative expenses (net of trade expense) were $607.8 million for the three months ended September 30, 2020, compared to $437.9 million for the same period in 2019, an increase of $169.9 million, or 38.8%. The increase was primarily due to expenses associated with Tribune stations and other businesses we acquired in 2019 of $153.0 million (including network and programming costs of $104.5 million) and our current year station acquisitions of $13.2 million. In addition, our legacy stations’ programming costs increased by $26.2 million, primarily due to network affiliation renewals and annual increases in our network affiliation costs and an increase in selling, general and administrative expenses. In the third quarter of 2020, we also recorded a $13.1 million provision for uncollectible amounts due from Marshall. These increases were partially offset by a decrease in expense from our station divestitures of $11.8 million, a decrease in expense due to our deconsolidation of Marshall in December 2019 of $3.8 million and a $29.6 million decrease in the operating expenses of our digital products due to lower revenue.

Depreciation of property and equipment was $36.6 million for the three months ended September 30, 2020, compared to $29.4 million for the same period in 2019, an increase of $7.2 million, or 24.7%, primarily due to incremental depreciation from the Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, partially offset by station divestitures and deconsolidation of Marshall, and increased depreciation from newly capitalized assets related to station repacking activities.

Amortization of intangible assets was $69.3 million for the three months ended September 30, 2020, compared to $42.4 million for the same period in 2019, an increase of $26.8 million, or 63.2%. This was primarily due to increased amortization from the Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, partially offset by decreases in amortization from certain fully amortized assets, divested stations and deconsolidation of Marshall.

Amortization of broadcast rights was $32.0 million for the three months ended September 30, 2020, compared to $18.5 million for the same period in 2019, an increase of $13.5 million, or 73.3%. The increase was primarily due to incremental amortization from the Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, less decreases from station divestitures. This increase was partially offset by a reduction in amortization costs on our legacy stations due to renegotiation of certain film contracts which resulted in reduced distribution rates.

Certain of the Company’s stations, including certain Tribune stations, were assigned to new channels (“repack”) in connection with the FCC’s process of repurposing a portion of the broadcast television spectrum for wireless broadband use. These stations have vacated their former channels by the prescribed FCC deadline of July 13, 2020 and are continuing to spend costs, mainly capital expenditures, to construct and license the necessary technical modifications to permanently operate on their newly assigned channels. Subject to fund limitations, the FCC reimburses television broadcasters, MVPDs and other parties for costs reasonably incurred due to the repack. During the three months ended September 30, 2020 and 2019, we received a total of $12.9 million and $20.4 million, respectively, in reimbursements from the FCC which we recognized as operating income.

Income on equity investments, net

Income on equity investments, net was $15.9 million for the three months ended September 30, 2020, compared to $3.2 million for the same period in 2019, an increase of $12.7 million. The increase was primarily attributable to our 31.3% equity in earnings of TV Food Network, less the amortization of basis difference. On September 19, 2019, we acquired our 31.3% ownership stake in TV Food Network through our merger with Tribune.

Pension and other postretirement plans credit, net

Pension and other postretirement plans credit, net was $10.8 million for the three months ended September 30, 2020, compared to $2.6 million for the same period in 2019, an increase of $8.2 million, primarily attributable to pension plans and other postretirement benefits we assumed through our merger with Tribune on September 19, 2019.

Interest Expense, net

 

Interest expense, net was $77.3 million for the three months ended September 30, 2020, compared to $93.2 million for the same period in 2019, a decrease of $15.9 million, or 17.1%. The decrease was in conjunction with Nexstar's redemption of 6.125% and 5.875% Notes and a decrease in interest expense on our term loans due to the combined effect of reduction in principal and London Interbank Offered Rate (“LIBOR”).

Loss on Extinguishment of Debt

During the three months ended September 30, 2020, loss on extinguishment of debt was $37.4 million primarily due to loss on redemption of our $900.0 million 5.625% Notes due 2024, and prepayments on our term loans of $250.0 million. There was no loss on extinguishment of debt as there was no debt prepayment or transaction that would result in recognition of such loss during the same period in 2019.

48

Income Taxes

 

Income tax expense was $65.2 million for the three months ended September 30, 2020 compared to $39.5 million for the same period in 2019. The effective tax rates, which decreased in the current year, were 25.6% and 115.1% for each of the respective periods. In 2019, Nexstar recorded an income tax expense of $12.8 million attributable to nondeductible goodwill written off as a result of the Nexstar Divestitures related to the merger with Tribune (See Note 3), or a 37.3% decrease to the effective tax rate in 2020. Additionally, the goodwill impairment loss recorded in 2019 was not deductible for purposes of calculating the tax provision and resulted in an income tax expense of $11.1 million in 2019, or a 32.3% decrease to the effective tax rate in 2020. Also, certain transaction and severance costs that Nexstar incurred in connection with its merger with Tribune in 2019 (See Note 3) were determined to be nondeductible for tax purposes. This resulted in an income tax expense of $6.0 million in 2019, or a 17.6% decrease to the effective tax rate in 2020.

 

The Company calculates its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year-to-date pre-tax income or loss and adjusts the provision for discrete tax items recorded in the period. Future changes in the forecasted annual income projections, including changes due to the impact of the COVID-19 pandemic, could result in significant adjustments to quarterly income tax expense in future periods.

 

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

 

The period-to-period comparability of our consolidated operating results is affected by acquisitions. For each quarter we present, our legacy stations include those stations that we owned or provided services to for the complete quarter in the current and prior years. For our annual and year to date presentations, we combine the legacy stations’ amounts presented in each quarter.

Revenue

Core advertising revenue was $1,097.5 million for the nine months ended September 30, 2020, compared to $809.7 million for the same period in 2019, an increase of $287.8 million, or 35.6%. The increase is primarily due to our incremental revenue from Tribune stations and other businesses we acquired in 2019 of $457.9 million, and an increase in revenue from our current year station acquisitions of $11.9 million, partially offset by a decrease in revenue from station divestitures of $33.0 million. Our legacy stations’ core advertising revenue decreased by $143.9 million, primarily due to the business disruptions caused by COVID-19 since mid-March of 2020 and changes in the mix between our core and political advertising. Our deconsolidation of Marshall in December 2019 also resulted in a $5.0 million decrease in revenue. Our largest advertiser category, automobile, represented approximately 17% and 22% of our core advertising revenue for the nine months ended September 30, 2020 and 2019, respectively. Overall, including past results of our newly acquired stations, automobile revenues decreased by approximately 36% in 2020. The other categories representing our top five which decreased in 2020 were attorneys, medical/healthcare, furniture and fast food restaurants. We currently estimate that overall core advertising revenue for the remainder of fiscal 2020 will continue to be negatively impacted by the business disruptions caused by COVID-19. The full extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that the U.S. government, we, or our business partners, may direct, which may result in an extended period of continued business disruption. Further financial impact cannot be reasonably estimated at this time but may continue to have a material impact on our core advertising revenue and our overall results of operations. Additionally, the rescheduling of the summer Olympics to 2021, also due to the COVID-19 pandemic situation, decreased our advertising revenue in 2020 but is expected to increase our advertising revenue in 2021.

Political advertising revenue was $209.3 million for the nine months ended September 30, 2020, compared to $15.4 million for the same period in 2019, an increase of $193.9 million, as 2020 is an election year. Of the $193.9 million increase, $68.2 million was attributable to the incremental revenue from Tribune stations we acquired in 2019, $5.8 million was attributable to our current year station acquisitions, and $120.9 million was attributable to our legacy stations. We expect an increase in political advertising revenue in 2020 compared to 2019.

Distribution revenue was $1,624.6 million for the nine months ended September 30, 2020, compared to $923.1 million for the same period in 2019, an increase of $701.6 million, or 76.0%. The increase is primarily due to incremental revenue in 2020 from Tribune acquisition in September 2019 of $536.9 million (including $12.3 million revenue from copyright cable royalty received in second quarter of 2020) and our current year station acquisitions of $28.8 million. Our legacy stations’ revenue increased by $195.4 million, primarily due to scheduled annual escalation of rates per subscriber, renewals of contracts providing for higher rates per subscriber (contracts generally have a three-year term), contributions from distribution agreements with OVDs and increase in revenue in 2020 resulting from the temporary disruption of distribution agreements with AT&T/DirecTV from July 2, 2019 to August 29, 2019. These increases were partially offset by a decrease in revenue due to station divestitures of $46.1 million and deconsolidation of Marshall of $13.1 million. We anticipate continued increase of retransmission fees until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.

49

Digital revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $158.3 million for the nine months ended September 30, 2020, compared to $167.2 million for the same period in 2019, a decrease of $8.9 million, or 5.3%. Our digital businesses’ revenue decreased by $22.9 million primarily due to the business disruption caused by COVID-19 since mid-March of 2020 and realigned digital business operations. Our legacy stations’ revenue from web and mobile sites also decreased by $5.3 million primarily due to the business disruption caused by COVID-19 since mid-March of 2020. These decreases were partially offset by incremental revenue from Tribune stations and other businesses we acquired in 2019 of $22.7 million, less a decrease in revenue from station divestitures of $3.5 million.

 

Operating Expenses

 

Corporate expenses, related to costs associated with the centralized management of our stations, were $128.6 million for the nine months ended September 30, 2020, compared to $125.8 million for the same period in 2019, an increase of $2.7 million, or 2.2%. This was primarily attributable to an increase in payroll and bonuses of $1.7 million, an increase in stock-based compensation of $3.2 million due to new equity incentives granted, and increase in legal fees of $5.4 million primarily attributable to the ongoing litigation inherited from Tribune, and an overall increase in overhead costs, including property rentals, hardware, communications and software licenses, of $13.4 million. These increases were partially offset by decreases in severance and professional fees of $9.6 million and $11.3 million, respectively, primarily associated with the Tribune acquisition in 2019.

 

Station direct operating expenses, consisting primarily of news, engineering, programming and station selling, general and administrative expenses (net of trade expense) were $1,786.1 million for the nine months ended September 30, 2020 compared to $1,243.3 million for the same period in 2019, an increase of $542.8 million, or 43.7%. This was primarily due to expenses associated with the Tribune stations and other businesses we acquired in 2019 of $525.4 million (including network and programming costs of $352.9 million), and expenses associated with our current year station acquisitions of $26.6 million. In addition, our legacy stations’ programming costs increased by $84.1 million, primarily due to network affiliation renewals and annual increases in our network affiliation costs. In the third quarter of 2020, we also recorded a $13.1 million provision for uncollectible amounts due from Marshall. These increases were partially offset by a decrease in expense from our station divestitures of $43.9 million, a decrease in expense due to our deconsolidation of Marshall in December 2019 of $11.3 million and a $59.5 million decrease in the operating expenses of our digital products due to lower revenue.

 

Depreciation of property and equipment was $107.8 million for the nine months ended September 30, 2020, compared to $84.9 million for the same period in 2019, an increase of $22.9 million, or 27.0%. The increase was primarily due to incremental depreciation from Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, partially offset by station divestitures, and increased depreciation from newly capitalized assets related to station repacking activities.

 

Amortization of intangible assets was $209.4 million for the nine months ended September 30, 2020, compared to $115.5 million for the same period in 2019. This was primarily due to increased amortization from Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, partially offset by decreases in amortization from certain fully amortized assets and divested stations.

 

Amortization of broadcast rights was $104.9 million for the nine months ended September 30, 2020, compared to $46.7 million for the same period in 2019, an increase of $58.2 million, or 124.4%, The increase was primarily due to incremental amortization from Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, less decreases from station divestitures. This increase was partially offset by a reduction in amortization costs on our legacy stations due to renegotiation of certain film contracts which resulted in reduced distribution rates.

 

Certain of the Company’s stations, including certain Tribune stations, were repacked in connection with the FCC’s process of repurposing a portion of the broadcast television spectrum for wireless broadband use. These stations have vacated their former channels by the FCC-prescribed deadline of July 13, 2020 and are continuing to spend costs, mainly capital expenditures, to construct and license the necessary technical modifications to permanently operate on their newly assigned channels. Subject to fund limitations, the FCC reimburses television broadcasters, MVPDs and other parties for costs reasonably incurred due to the repack. During the nine months ended September 30, 2020 and 2019, the Company received $51.3 million and $54.0 million, respectively, in reimbursements from the FCC which it recognized as operating income.

In April 2020, we completed a station’s conversion to a VHF channel representing our final relinquishment of spectrum pursuant to the FCC’s incentive auction conducted in 2016-2017. Accordingly, the associated spectrum asset with a carrying amount of $67.2 million and liability to surrender spectrum of $78.0 million, were derecognized, resulting in a non-cash gain on relinquishment of spectrum of $10.8 million. This gain was partially offset by a $3.9 million increase (expense) in the estimated fair value of contingent consideration liability related to a merger and spectrum auction. 

50

Income on equity investments, net

Income on equity investments, net was $41.4 million for the nine months ended September 30, 2020, compared to $2.1 million for the same period in 2019, an increase of $39.3 million, primarily attributable to our 31.3% equity in earnings of TV Food Network, less amortization of basis difference. On September 19, 2019, we acquired a 31.3% ownership stake in TV Food Network through our merger with Tribune.

Pension and other postretirement plans credit, net

Pension and other postretirement plans credit, net was $32.3 million for the nine months ended September 30, 2020, compared to $5.4 million for the same period in 2019, an increase of $26.9 million, primarily attributable to the pension plans and other postretirement benefit plans we assumed through our merger with Tribune on September 19, 2019.

 

Interest Expense, net

 

Interest expense, net was $260.8 million for the nine months ended September 30, 2020, compared to $197.5 million for the same period in 2019, an increase of $63.3 million, or 32.0%. The increase was primarily due to interest incurred on term loans issued on September 19, 2019 and on 5.625% Notes due 2027 issued July 3, 2019 which were both related to the financing of Nexstar's acquisition of Tribune and have full nine months-worth of expense in 2020, partially offset primarily by a decrease in interest expense in conjunction with Nexstar's redemption of 6.125% and 5.875% Notes and a decrease in interest expense on our legacy term loans due to the combined effect of reduction in principal and the LIBOR.

 

Loss on Extinguishment of Debt

 

Loss on extinguishment of debt was $44.8 million for the nine months ended September 30, 2020, compared to $3.7 million for the same period in 2019, an increase of $41.1 million, primarily due to loss on redemption of our $900.0 million 5.625% Notes due 2024, and an increase in prepayments on our term loans of $500.0 million in 2020 compared to the prior period.

 

Income Taxes

 

Income tax expense was $166.9 million for the nine months ended September 30, 2020 compared to $82.6 million for the same period in 2019. The effective tax rates, which decreased in the current year, were 27.3% and 40.3% for each of the respective periods. In 2019, Nexstar recorded an income tax expense of $12.8 million attributable to nondeductible goodwill written off as a result of the Nexstar Divestitures related to the merger with Tribune (See Note 3), or a 6.3% decrease to the effective tax rate in 2020. Additionally, the goodwill impairment loss recorded in 2019 was not deductible for purposes of calculating the tax provision and resulted in an income tax expense of $11.1 million in 2019, or a 5.4% decrease to the effective tax rate in 2020. Also, certain transaction and severance costs that Nexstar incurred in connection with its merger with Tribune in 2019 (See Note 3) were determined to be nondeductible for tax purposes. This resulted in an income tax expense of $6.0 million in 2019, or a 2.9% decrease to the effective tax rate in 2020.


51

Liquidity and Capital Resources

 

The Company is leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to repay or refinance its debt will depend on, among other things, financial, business, market, competitive and other conditions, many of which are beyond the Company’s control, for instance, uncertainties surrounding the business outlook caused by Coronavirus Disease 2019 (“COVID-19”). In December 2019, COVID-19 was reported and has spread globally, including to every state in the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic and the United States government declared a national emergency with respect to COVID-19. COVID-19 has created and may continue to create significant uncertainty in global financial markets, which may reduce demand for our advertising, retransmission, and digital services, impact the productivity of our workforce, reduce our access to capital, and harm our business and results of operations.

 

In the third quarter in 2020, our financial results continued to improve as certain areas throughout the United States permitted the re-opening of non-essential businesses which has had a favorable impact to the macroeconomic environment and to the Company’s revenue. As of September 30, 2020, we remained profitable. Our current year results were also higher than our prior year results primarily due to contribution from our acquisition of Tribune in September 2019 and revenue from political advertising in 2020. As of September 30, 2020, there have been no material changes in our customer mix, including our advertisers, multichannel video programming distributors and online video distributors. The disruptions from COVID-19 did not have a material impact on the Company’s liquidity. As of September 30, 2020, the Company’s unrestricted cash on hand amounted to $409.9 million and the Company had positive working capital of $669.5 million, both increased from the December 31, 2019 levels of $232.1 million and $404.2 million, respectively. As of September 30, 2020, the Company was in compliance with its financial covenants contained in the amended credit agreements governing its senior secured credit facilities. The Company believes it has sufficient unrestricted cash on hand and has availability to access additional cash up to $172.7 million and $25.0 million under the respective Nexstar and Mission revolving credit facilities (with a maturity date of October 2023) to meet its business operating requirements, its capital expenditures and to continue to service its debt for at least the next 12 months as of the filing date of this Quarterly Report on Form 10-Q. The Company also believes its leverage is well positioned to withstand the current challenges as the nearest maturity of its outstanding debt will not occur until October 2023. The Company will continue to evaluate its liquidity, its best use of operating cash flow and the market conditions to determine if further steps are necessary.

Overview

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

  

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Net cash provided by operating activities

 

$

877,488

 

 

$

315,982

 

Net cash provided by (used in) investing activities

 

 

260,362

 

 

 

(4,582,153

)

Net cash provided by (used in) financing activities

 

 

(960,012

)

 

 

4,455,085

 

Net increase in cash, cash equivalents and restricted cash

 

$

177,838

 

 

$

188,914

 

Cash paid for interest

 

$

290,250

 

 

$

178,882

 

Income taxes paid, net of refunds

 

$

201,979

 

 

$

68,627

 

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

2020

 

 

2019

 

Cash, cash equivalents and restricted cash

 

$

426,516

 

 

$

248,678

 

Long-term debt, including current portion

 

 

7,882,540

 

 

 

8,492,588

 

Unused revolving loan commitments under senior secured credit facilities (1)

 

 

197,662

 

 

 

142,662

 

 

(1)

Based on covenant calculations as of September 30, 2020, all of the $172.7 million and $25.0 million unused revolving loan commitments under the respective Nexstar and Mission senior secured credit facilities were available for borrowing.

52

Cash Flows – Operating Activities

Net cash flows provided by operating activities increased by $561.5 million during the nine months ended September 30, 2020, compared to the same period in 2019. This was primarily due to increases in revenue (excluding trade) of $1,188.3 million,   distributions from our equity investments in TV Food Network of $207.0 million, source of cash resulting from timing of accounts receivable collections of $38.7 million, and collection of copyright cable royalty receivable of $13.9 million. These increases were partially offset by an increase in our corporate, direct operating and selling, general and administrative expense (excluding non-cash transactions) of $525.9 million, cash paid for interest of $111.4 million, payments for broadcast rights of $100.1 million, use of cash resulting from timing of payments to our vendors of $13.9 million, and higher tax payments of $133.4 million.

Cash Flows – Investing Activities

Net cash flows provided by investing activities were $260.4 million during the nine months ended September 30, 2020, compared to net cash flows used in investing activities of $4,582.2 million in the same period in 2019. In 2020, we sold two television stations and our sports betting information website business for $349.9 million and $12.9 million in cash, respectively. We also received $98.0 million of cash proceeds from settlement of litigation between Sinclair and Tribune, which we acquired in September 2019, and collected Mission’s loan receivable of $49.0 million from Marshall. These increases were reduced by the cash payments the Company made to acquire a total of six television stations and certain non-license assets for total cash consideration payments of $132.3 million. In September 2019, we completed our acquisition of Tribune for a total cash purchase price of $7.187 billion, less $1.289 billion of cash acquired. Substantially concurrently with our Merger with Tribune, we sold the assets of 21 full power television stations in 16 markets for a cash consideration of $1.353 billion, including preliminary working capital adjustments and net of related fees. We also received $1.2 million in proceeds from disposal of assets. Our capital expenditures during the nine months ended September 30, 2020 were $170.2 million, an increase of $59.9 million compared to the same period in 2019, primarily due to increased capital expenditure requirements from Tribune stations and other businesses we acquired in 2019, partially offset by station divestitures. Other activity included a decrease in reimbursements from the FCC for station repack costs of $2.7 million.

Cash Flows – Financing Activities

Net cash flows used in financing activities were $960.0 million during the nine months ended September 30, 2020, compared to net cash flows provided by financing activities of $4,455.1 million in the same period in 2019.

In 2020, we made payments on the outstanding principal balance of our term loans of $957.8 million (including $680.0 million in Nexstar’s debt prepayments and Mission’s full repayment of its term loan B of $224.5 million), redeemed our $900.0 million unsecured senior notes and paid $25.3 million premium on such redemption, paid dividends to our common stockholders of $76.4 million ($0.56 per share during each quarter), paid deferred financing costs of $10.7 million associated with our new $1.0 billion senior unsecured notes, repurchased common shares of $197.6 million, paid cash for taxes in exchange for shares of common stock withheld of $6.8 million resulting from net share settlements of certain stock-based compensation, and paid for finance lease and software obligations of $12.7 million. These decreases were offset by the proceeds from the issuance of our new $1.0 billion senior unsecured notes issued at par and from Mission’s drawing from the revolving credit facilities of $225.0 million.

 

In 2019, we issued $1.120 billion new 5.625% Notes due 2027, $670.4 million new Term Loan A (net of lender fees), and $3.041 billion new Term Loan B (net of lender fees) which were all used to partially fund the acquisition of Tribune and received $1.75 million in proceeds from exercise of stock options. The cash flow increases were partially offset by the repayment of term loans of $215.4 million, payments for debt financing costs of $70.7 million, payments of dividend to our common stockholders of $62.1 million ($0.45 per share each quarter), cash payment for taxes in exchange for shares of common stock withheld of $9.8 million, payment for noncontrolling interest of KHII of $6.4 million, payment for capital lease of $6.4 million and uses of cash from other financing activities of $6.9 million.

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


53

Future Sources of Financing and Debt Service Requirements

 

As of September 30, 2020, the Company had total combined debt of $7.9 billion, net of financing costs and discounts, which represented 77.9% of the Company’s combined capitalization. The Company’s high level of debt requires that a substantial portion of cash flow be dedicated to pay principal and interest on debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.

 

The following table summarizes the principal indebtedness scheduled to mature for the periods referenced as of September 30, 2020 (in thousands):

 

 

Total

 

 

2020

 

 

2021-2022

 

 

2023-2024

 

 

Thereafter

 

Nexstar senior secured credit facility

 

$

4,935,915

 

 

$

5,357

 

 

$

79,967

 

 

$

1,958,955

 

 

$

2,891,636

 

Mission senior secured credit facility

 

 

225,000

 

 

 

-

 

 

 

-

 

 

 

225,000

 

 

 

-

 

Shield senior secured credit facility

 

 

20,950

 

 

 

287

 

 

 

3,903

 

 

 

16,760

 

 

 

-

 

5.625% Notes due 2027

 

 

1,785,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,785,000

 

4.75% Notes due 2028

 

 

1,000,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,000,000

 

 

 

$

7,966,865

 

 

$

5,644

 

 

$

83,870

 

 

$

2,200,715

 

 

$

5,676,636

 

 

We make semiannual interest payments on the 5.625% Notes due 2027 on January 15 and July 15 of each year. We make semiannual interest payments on our 4.75% Notes due 2028 on May 1 and November 1 of each year. Interest payments on our, Mission’s and Shield’s senior secured credit facilities are generally paid every one to three months and are payable based on the type of interest rate selected.

The terms of our, Mission’s and Shield’s senior secured credit facilities, as well as the indentures governing our 5.625% Notes due 2027 and 4.75% Notes due 2028, limit, but do not prohibit us, Mission or Shield, from incurring substantial amounts of additional debt in the future.

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

The Company had $197.7 million of total unused revolving loan commitments under the senior secured credit facilities, all of which were available for borrowing, based on the covenant calculations as of September 30, 2020. The Company’s ability to access funds under its senior secured credit facilities depends, in part, on our compliance with certain financial covenants. Any additional drawings under the senior secured credit facilities will reduce the Company’s future borrowing capacity and the amount of total unused revolving loan commitments. As discussed above, the ultimate outcome of the COVID-19 pandemic is uncertain at this time and may significantly impact our future operating performance, liquidity and financial position. Any adverse impact of the COVID-19 pandemic may cause us to seek alternative sources of funding, including accessing capital markets, subject to market conditions. Such alternative sources of funding may not be available on commercially reasonable terms or at all.

 

On July 8, 2020, Nexstar assigned to Mission its option to purchase the CW affiliated station WPIX in the New York, NY market from Scripps. On the same date, Mission notified Scripps of its exercise of the option to purchase the station for a purchase price of $75.0 million, subject to customary adjustments, plus accrued interest in accordance with the option agreement. On August 28, 2020, Mission signed a purchase agreement to acquire WPIX. Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition is subject to FCC approval and other customary conditions and Mission expects it to close at the end of 2020. Upon Mission’s acquisition of WPIX, Nexstar intends to enter into a local service agreement and option agreement.

 

On August 7, 2020, Nexstar assigned to Mission its option to purchase the assets of WNAC, the Fox affiliated full power television station serving the Providence, Rhode Island market, from WNAC, LLC. On the same date, Mission notified WNAC, LLC of its exercise of the option and simultaneously entered into an Assignment and Assumption Agreement with Nexstar. The purchase price is equal to a base purchase price, plus an escalation amount per day from the date of the option agreement until the completion of the acquisition, minus a credit for an outstanding loan (all defined in the option agreement). Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition has received FCC approval and Mission expects it to close in the fourth quarter of 2020. Nexstar currently provides services to WNAC under an LMA which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase WNAC from Mission.

 


54

On August 7, 2020, Nexstar also assigned to Mission its option to purchase KASY, KWBQ and KRWB from Tamer. KASY (MNTV affiliated), KWBQ (CW affiliated) and KRWB (CW affiliated) are full power television stations serving the Albuquerque, New Mexico market. On the same date, Mission notified Tamer of its exercise of the option and simultaneously entered into an Assignment and Assumption Agreement with Nexstar. The purchase price is equal to a base purchase price, plus an escalation amount per year from the date of the option agreement until completion of the acquisition, minus a fixed monthly credit from the date of the option agreement until completion of the acquisition (all defined in the option agreement). Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition has received FCC approval and Mission expects it to close in the fourth quarter of 2020. Nexstar currently provides services to these stations under an SSA which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase the stations from Mission.

 

On August 10, 2020, Nexstar assigned to Mission its options to purchase WXXA-TV, the Fox affiliate in the Albany, NY market, and WLAJ-TV, the ABC affiliate in the Lansing, MI market, from Shield. On the same date, Mission notified Shield of its exercise of the options to purchase the stations and simultaneously entered into an Assignment and Assumption Agreement with Nexstar. The purchase price of these stations was $20.8 million. Mission expects to fund this acquisition through new borrowing that is to be guaranteed by Nexstar. The proposed acquisition of the Shield stations has received FCC consent and Mission expects it to close in the fourth quarter of 2020. Nexstar currently provides services to the Shield Stations under JSAs and SSAs which it intends to continue with Mission upon its completion of the acquisition. Nexstar also intends to enter into an option agreement to purchase the stations from Mission.

On September 1, 2020, Nexstar’s Board of Directors approved $300 million in Nexstar’s share repurchase authorization to repurchase its Class A common stock. As of September 30, 2020, the remaining available amount under the share repurchase authorization was $259.2 million, net of all repurchases made. Share repurchases may be made from time to time in open market transactions, block trades or in private transactions. There is no minimum number of shares that Nexstar is required to repurchase and the repurchase program may be suspended or discontinued at any time without prior notice.

 

On October 9, 2020, Nexstar contributed $34.8 million in cash to the Tribune qualified pension plans. Nexstar projects no additional cash contribution to its qualified pension plans during the remainder of 2020.

 

On October 19, 2020, Nexstar acquired 2,927,522 shares in Series A Preferred Stock of VENN, a live 24/7 streaming network for gaming and entertainment based in Los Angeles, CA, for a total cash consideration of $7.0 million.

 

On October 21, 2020, our Board of Directors declared a quarterly cash dividend of $0.56 per share of our Class A common stock. The dividend is payable on November 20, 2020 to stockholders of record on November 6, 2020.

 

On October 30, 2020, Nexstar prepaid $300.0 million of the outstanding principal balance under its term loans, funded by cash on hand.

Debt Covenants

Our credit agreement contains a covenant which requires us to comply with a maximum consolidated first lien net leverage ratio of 4.25 to 1.00. The financial covenant, which is formally calculated on a quarterly basis, is based on our combined results. The Mission and Shield amended credit agreements do not contain financial covenant ratio requirements but do provide for default in the event we do not comply with all covenants contained in our credit agreement. As of September 30, 2020, we were in compliance with our financial covenant. We believe Nexstar, Mission, and Shield will be able to maintain compliance with all covenants contained in the credit agreements governing their senior secured facilities and the indentures governing our 5.625% Notes due 2027 and 4.75% Notes due 2028 for a period of at least the next 12 months from September 30, 2020.

Off-Balance Sheet Arrangements

As of September 30, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or VIEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. All of our arrangements with our VIEs in which we are the primary beneficiary are on-balance sheet arrangements. Our variable interests in other entities are obtained through local service agreements, which have valid business purposes and transfer certain station activities from the station owners to us. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

As of September 30, 2020, we have outstanding standby letters of credit with various financial institutions amounting to $23.7 million, of which $20.3 million was assumed from the 2019 Tribune acquisition primarily in support of the worker’s compensation insurance program. The outstanding balance of standby letters of credit is deducted against our unused revolving loan commitment under our senior secured credit facility and would not be available for withdrawal.


55

Summarized Financial Information

 

Nexstar Broadcasting’s (a wholly-owned subsidiary of Nexstar and herein referred to as the “Issuer”) 5.625% Notes due 2027 and 4.750% Notes due 2028 are fully and unconditionally guaranteed (the “Guarantees”), jointly and severally, by Nexstar Media Group, Inc. (“Parent”), Mission (a consolidated VIE) and certain of Nexstar Broadcasting’s restricted subsidiaries (collectively, the “Guarantors” and, together with the Issuer, the “Obligor Group”). The Guarantees are subject to release in limited circumstances upon the occurrence of certain customary conditions set forth in the indentures governing the 5.625% Notes due 2027 and the 4.75% Notes due 2028. The Issuer’s 5.625% Notes due 2027 and 4.75% Notes due 2028 are not registered with the SEC.

 

The following combined summarized financial information is presented for the Obligor Group after elimination of intercompany transactions between Parent, Issuer and Guarantors in the Obligor Group and amounts related to investments in any subsidiary that is a non-guarantor. This information is not intended to present the financial position or results of operations of the consolidated group of companies in accordance with U.S. GAAP.

 

Summarized Balance Sheet Information (in thousands) – Summarized balance sheet information as of September 30, 2020 and December 31, 2019 of the Obligor Group is as follows:

 

 

September 30, 2020

 

 

December 31, 2019

 

Current assets - external

$

1,304,636

 

 

$

1,291,730

 

Current assets - due from consolidated entities outside of Obligor Group

 

175,487

 

 

 

171,344

 

     Total current assets

$

1,480,123

 

 

$

1,463,074

 

Noncurrent assets - external(1)

 

10,358,163

 

 

 

10,869,745

 

Noncurrent assets - due from consolidated entities outside of Obligor Group

 

292,843

 

 

 

92,494

 

     Total noncurrent assets

$

10,651,006

 

 

$

10,962,239

 

Total current liabilities

$

649,443

 

 

$

904,811

 

Total noncurrent liabilities

$

10,334,777

 

 

$

10,733,488

 

Noncontrolling interests

$

6,391

 

 

$

6,250

 

 

(1)

Excludes Nexstar Broadcasting’s equity investments of $1.313 billion and $1.477 billion as of September 30, 2020 and December 31, 2019, respectively, in unconsolidated investees. These unconsolidated investees do not guarantee the 4.75% Notes due 2028 and 5.625% Notes due 2027. For additional information on equity investments, refer to Note 6 to our Condensed Consolidated Financial Statements.

 

Summarized Statements of Operations Information for the Obligor Group (in thousands):

 

 

Nine Months Ended

 

 

September 30, 2020

 

Net revenue - external

$

3,051,160

 

Net revenue - from consolidated entities outside of Obligor Group

 

22,737

 

     Total net revenue

 

3,073,897

 

Costs and expenses - external

 

2,185,646

 

Costs and expenses - to consolidated entities outside of Obligor Group

 

50,114

 

     Total costs and expenses

 

2,235,760

 

Income from operations

$

838,137

 

Net income

$

399,154

 

Net income attributable to Obligor Group

$

399,154

 

Income on equity method investments

$

41,384

 

 


56

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements and reported amounts of revenue and expenses during the period. On an ongoing basis, we evaluate our estimates, including those related to business acquisitions, goodwill and intangible assets, property and equipment, broadcast rights, retransmission compensation, pension and postretirement benefits, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, including the effects of the COVID-19 pandemic on our estimates and assumptions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.

 

Information with respect to the Company’s critical accounting policies which it believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in our Annual Report on Form 10-K for the year ended December 31, 2019. Management believes that as of September 30, 2020, there has been no material change to this information.

Recent Accounting Pronouncements

Refer to Note 2 of our Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements, including our expected date of adoption and effects on results of operations and financial position.

 

 


57

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relates primarily to its long-term debt obligations. The Company’s exposure to market risk did not change materially since December 31, 2019.

The term loan borrowings at September 30, 2020 under the Company’s senior secured credit facilities bear interest rates ranging from 1.90% to 2.90%, which represented the base rate, or the LIBOR plus the applicable margin, as defined. Interest is payable in accordance with the credit agreements.

If LIBOR were to increase by 100 basis points, or one percentage point, from its September 30, 2020 level, the Company’s annual interest expense would increase and cash flow from operations would decrease by approximately $49.6 million, based on the outstanding balances of the Company’s senior secured credit facilities as of September 30, 2020. An increase of 50 basis points in LIBOR would result in a $24.8 million increase in annual interest expense and decrease in cash flow from operations. If LIBOR were to decrease either by 100 basis points or 50 basis points, the Company’s annual interest would decrease and cash flow from operations would increase by $7.3 million. Since the onset of the COVID-19 pandemic, LIBOR has dropped significantly, and may be more volatile in the future, which could potentially impact our total interest expense. Our 5.625% Notes due 2027 and 4.75% Notes due 2028 are fixed rate debt obligations and therefore are not exposed to market interest rate changes. As of September 30, 2020, the Company has no financial instruments in place to hedge against changes in the benchmark interest rates on its senior secured credit facilities.

Impact of Inflation

 

We believe that the Company’s results of operations are not affected by moderate changes in the inflation rate. However, the COVID-19 pandemic has created great uncertainty about the path of the economy and society in the years ahead. Recent supply and demand shocks and dramatic changes in fiscal policy may lead to higher levels of inflation in future periods.

 

ITEM 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based upon that evaluation, Nexstar’s Chairman and Chief Executive Officer and its President, Chief Operating Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, Nexstar’s disclosure controls and procedures were effective, at a reasonable assurance level, to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to Nexstar’s management, including its Chairman and Chief Executive Officer and its President, Chief Operating Officer and 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, 2020, there have been no changes in Nexstar’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. Nexstar has not experienced any significant impact to its internal controls over financial reporting despite the fact that most of its employees are working remotely due to the COVID-19 pandemic. Nexstar is continually monitoring and assessing the COVID-19 situation on its internal controls to minimize the impact on their design and operating effectiveness.

 


58

PART II. OTHER INFORMATION

 

ITEM 1.

From time to time, the Company is involved in litigation that arises from the ordinary operations of business, such as contractual or employment disputes or other general actions. In the event of an adverse outcome of these proceedings, the Company believes the resulting liabilities would not have a material adverse effect on its financial condition or results of operations. See Part I, Item 1, Note 15, “Commitments and Contingencies” for detailed discussion of ongoing litigation.

 

ITEM  1A.

Risk Factors

Except as set forth below, as of September 30, 2020, there have been no material changes to the risk factors that were previously disclosed in Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020. We have also updated the risk factor related to COVID-19 pandemic that was previously identified in the first quarter of 2020 as follows:

Risks Related to Our Operations

 

Our business, results of operations, financial condition, cash flows and stock price have been and may continue to be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.

 

Our business, results of operations, financial condition, cash flows and stock price have been and may continue to be adversely affected by the COVID-19 outbreak. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments in the U.S. and around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

 

We are considered an essential industry, as defined by the U.S. Department of Homeland Security. Although we have continued to operate our facilities to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities have had and may continue to have a material adverse effect on our workforce and operations, customers (e.g. advertisers and advertising agencies) and supply chain. The impact of COVID-19 significantly reduced the demand for television advertising in 2020, mostly in the first part of the second quarter, and has had, and may continue to have, a material adverse impact on our financial condition, results of operations and cash flows in the second half of 2020 and/or in the future. The extent to which COVID-19 may adversely impact our business in the future depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions in the United States taken to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time, but may materially adversely affect our business, results of operations, financial condition and cash flows. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which has and may continue to adversely impact our stock price and our ability to access capital markets.

 

Our liquidity could also be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital to meet our business operating requirements, our capital expenditures and to continue to service our debt. Capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing on reasonable terms or at all is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required to improve the Company’s cash position, working capital and capital structure. Our credit rating could also be negatively affected, which could also impact our liquidity, our financial condition and our ability to obtain financing.

 

A sustained economic downturn may also result in the carrying values of our major assets, including goodwill, indefinite-lived intangible assets, long-lived assets and equity investments exceeding their fair value, which may require us to recognize an impairment to those assets. A sustained downturn in the financial markets and related pension asset values may have the effect of increasing our pension funding obligations in order to ensure that our qualified pension plans continue to be adequately funded, which may divert cash flow from other uses.

 

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019, such as those relating to our products and financial performance.  

59

ITEM  2.

Unregistered Sales of Equity Securities and Use of Proceeds

On September 1, 2020, Nexstar Media’s Board of Directors approved a $300 million increase in Nexstar Media’s share repurchase authorization to repurchase its Class A common stock. The expansion brings the total capacity under Nexstar’s share repurchase program to approximately $384.2 million when combined with the remaining available amount under its prior authorization and before reduction for any repurchases in the third quarter of 2020. 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.

The following is a summary of Nexstar’s repurchases of its Class A common stock by month during the quarter ended September 30, 2020:

 

 

 

 

 

 

 

 

 

 

Total Number of Shares

 

 

Approximate Dollar Value

 

 

 

 

 

 

 

 

 

 

Purchased as Part of

 

 

of Shares That May Yet Be

 

 

Total Number

 

 

Average Price

 

 

Publicly Announced

 

 

Purchased Under the

 

 

of Shares Purchased

 

 

Paid per Share

 

 

Plans or Programs

 

 

Plans or Programs

 

August 19-28, 2020

 

400,000

 

 

$

93.65

 

 

 

400,000

 

 

$

346,741,402

 

September 2-28, 2020

 

900,000

 

 

$

97.25

 

 

 

900,000

 

 

$

259,214,458

 

 

 

1,300,000

 

 

$

96.14

 

 

 

1,300,000

 

 

 

 

 

 

As of September 30, 2020, we had a remaining balance of $259.2 million available under the share repurchase program.

 

ITEM 3.

Defaults Upon Senior Securities

None.

 

ITEM  4.

Mine Safety Disclosures

None.

 

ITEM 5.

Other Information

None.


60

ITEM  6.

Exhibits

 

Exhibit No.

 

Description

10.3

 

Amendment No. 4 to Credit Agreement, dated as of September 3, 2020, by and among Nexstar Broadcasting, Inc. and Bank of America, N.A. as administrative agent (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A (File No. 000-50478) filed by Nexstar Media Group, Inc. on September 9, 2020).

10.4

 

Amendment No. 3 to Credit Agreement, dated as of September 3, 2020, by and among Mission Broadcasting, Inc. and Bank of America, N.A. as administrative agent Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A (File No. 000-50478) filed by Nexstar Media Group, Inc. on September 9, 2020).

10.5

 

Indenture, dated as of September 25, 2020, between Nexstar Broadcasting, Inc. and Citibank, N.A., as trustee (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Media Group, Inc. on September 25, 2020).

10.6

 

Executive Employment Agreement, dated as of September 25, 2020, between Thomas E. Carter and Nexstar Media Group, Inc. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Media Group, Inc. on October 1, 2020).

31.1

 

Certification of Perry A. Sook pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

 

Certification of Thomas E. Carter pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

 

Certification of Perry A. Sook pursuant to 18 U.S.C. ss. 1350.*

32.2

 

Certification of Thomas E. Carter pursuant to 18 U.S.C. ss. 1350.*

101

 

The Company’s unaudited Condensed Consolidated Financial Statements and related Notes for the quarter ended September 30, 2020 from this Quarterly Report on Form 10-Q, formatted in iXBRL (Inline eXtensible Business Reporting Language).*

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*

Filed herewith

61

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

NEXSTAR MEDIA GROUP, INC.

 

 

 

 

/S/ PERRY A. SOOK

By:

 

Perry A. Sook

Its:

 

Chairman and Chief Executive Officer (Principal Executive Officer)

 

 

 

 

/S/ THOMAS E. CARTER

By:

 

Thomas E. Carter

Its:

 

President, Chief Operating Officer and Chief Financial Officer (Principal Accounting and Financial Officer)

Dated: November 6, 2020