UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 333-62916-02
MISSION BROADCASTING, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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51-0388022 |
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(State of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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30400 Detroit Road, Suite 304, Westlake, Ohio |
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44145 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
(440) 526-2227
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐
Note: The registrant is a voluntary filer and is not subject to the filing requirements. However, the registrant 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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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(Do not check if a smaller reporting company) |
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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 August 10,
TABLE OF CONTENTS
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PART I |
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FINANCIAL INFORMATION |
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ITEM 1. |
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Condensed Balance Sheets as of June 30, 2018 and December 31, 2017 |
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Condensed Statements of Operations for the three and six months ended June 30, 2018 and 2017 |
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Condensed Statements of Cash Flows for the six months ended June 30, 2018 and 2017 |
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ITEM 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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14 |
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ITEM 3. |
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22 |
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ITEM 4. |
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22 |
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PART II |
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OTHER INFORMATION |
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ITEM 1. |
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23 |
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ITEM 1A. |
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23 |
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ITEM 2. |
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23 |
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ITEM 3. |
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ITEM 4. |
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ITEM 5. |
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23 |
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ITEM 6. |
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23 |
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PART I. FINANCIAL INFORMATION
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ITEM 1. |
Financial Statements |
MISSION BROADCASTING, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share information, unaudited)
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June 30, |
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December 31, |
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2018 |
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2017 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Due from Nexstar Broadcasting, Inc. |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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FCC licenses |
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Other intangible assets, net |
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Deferred tax assets, net |
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Other noncurrent assets, net |
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Total assets |
$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' DEFICIT |
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Current liabilities: |
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Current portion of debt |
$ |
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$ |
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Current portion of broadcast rights payable |
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Accounts payable |
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Accrued expenses |
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Interest payable |
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Other current liabilities |
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Total current liabilities |
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Debt |
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Other noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies (Note 10) |
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Shareholders' deficit: |
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Common stock - $ June 30, 2018 and December 31, 2017 |
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Subscription receivable |
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( |
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( |
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Accumulated deficit |
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( |
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Total shareholders' deficit |
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Total liabilities and shareholders' deficit |
$ |
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$ |
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The accompanying Notes are an integral part of these Condensed Financial Statements.
1
MISSION BROADCASTING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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Net broadcast revenue |
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$ |
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$ |
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$ |
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$ |
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Revenue from Nexstar Broadcasting, Inc. |
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Net revenue |
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Operating expenses (income): |
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Direct operating expenses, excluding depreciation and amortization |
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Selling, general and administrative expenses, excluding depreciation and amortization |
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Fees incurred pursuant to local service agreements with Nexstar Broadcasting, Inc. |
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Amortization of broadcast rights |
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Amortization of intangible assets |
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Depreciation |
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Reimbursement from the FCC related to station repack |
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- |
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- |
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Total operating expenses |
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Income (loss) from operations |
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Interest expense |
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Loss on extinguishment of debt |
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- |
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- |
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- |
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(Loss) income before income taxes |
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Income tax benefit (expense) |
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( |
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( |
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Net (loss) income |
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$ |
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$ |
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$ |
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$ |
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The accompanying Notes are an integral part of these Condensed Financial Statements.
2
MISSION BROADCASTING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
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Six Months Ended |
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June 30, |
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2018 |
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2017 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Deferred income taxes |
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Provision for bad debt |
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Depreciation of property and equipment |
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Amortization of intangible assets |
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Amortization of debt financing costs and debt discount |
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Amortization of broadcast rights, excluding barter |
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Payments for broadcast rights |
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Deferred gain recognition |
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Loss on extinguishment of debt |
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- |
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Changes in operating assets and liabilities, net of acquisitions: |
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Accounts receivable |
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( |
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Prepaid expenses and other current assets |
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Other noncurrent assets |
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Accounts payable, accrued expenses and other current liabilities |
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Other noncurrent liabilities |
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Due from Nexstar Broadcasting, Inc. |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
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( |
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Payment for acquisition |
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- |
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( |
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Net cash used in investing activities |
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( |
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Cash flows from financing activities: |
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Proceeds from issuance of long-term debt |
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- |
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Repayments of long-term debt |
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( |
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( |
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Payments for debt financing costs |
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- |
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Net cash (used in) provided by financing activities |
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( |
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Net decrease in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Non-cash investing activities: |
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Accrued purchases of property and equipment |
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$ |
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$ |
- |
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Supplemental information: |
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Interest paid |
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$ |
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$ |
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Income taxes paid, net of refunds |
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$ |
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$ |
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The accompanying Notes are an integral part of these Condensed Financial Statements.
3
MISSION BROADCASTING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Organization and Business Operations
As of June 30, 2018, Mission Broadcasting, Inc. (“Mission” or the “Company”) owned and operated
The Company is highly 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 its control, as well as Nexstar maintaining its pledge to continue the local service agreements with the Company’s stations. Management believes that with Nexstar’s pledge to continue the local service agreements as described in a letter of support dated March 23, 2018, the Company’s available cash, anticipated cash flow from operations and available borrowings under its senior secured credit facility should be sufficient to fund working capital, capital expenditure requirements, interest payments and scheduled debt principal payments for at least the next 12 months from August 10, 2018, enabling Mission to continue to operate as a going concern.
Nexstar’s senior secured credit agreement contains a covenant which requires Nexstar to comply with a maximum consolidated first lien net leverage ratio of
2. Summary of Significant Accounting Policies
Interim Financial Statements
The Condensed Financial Statements as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 are unaudited. However, in the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The preparation of the Condensed Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. These Condensed Financial Statements should be read in conjunction with the Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The balance sheet as of December 31, 2017 has been derived from the audited Financial Statements as of that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.
Revenue Recognition
As discussed in Recent Accounting Pronouncements below, the Company adopted the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) and all related amendments. ASC 606 establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services and requires significantly enhanced revenue disclosures. The Company adopted this standard effective January 1, 2018 using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning on or after January 1, 2018 is presented under ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 606.
4
The Company’s revenue is primarily derived from the sale of advertising by Nexstar under joint sales agreements (“JSAs”), and the compensation received from multichannel video programming distributors (“MVPDs”) in its markets in return for the Company’s consent to the retransmission of the signals of its television stations. Total revenue includes revenue from Nexstar, retransmission compensation, and other broadcast related revenues. The Company determines whether gross or net presentation is appropriate based on its relationship in the applicable transaction with its ultimate customer. Any amounts paid by customers but not earned as of the balance sheet date are recorded as a contract liability (deferred revenue). The lag between billing the customers and when the payment is due is not significant.
Revenue from Nexstar is directly correlated to the advertising revenue earned at the Company’s stations and is recognized, for the amount the Company is entitled to receive, when the television advertising spots are sold by Nexstar and the advertisements are broadcast on Mission stations or delivered on Mission’s television station websites. Television advertising contracts are short-term in nature.
The Company’s retransmission consent agreements with MVPDs generally have a three-year term and provide revenue based on a monthly amount the Company is entitled to receive per subscriber. Under ASC 606, these revenues are considered arising from the licensing of functional intellectual property. As such, the Company applied the exception for sales- or usage-based royalty for the accounting of variable consideration and recognizes revenues (retransmission compensation) at the point in time the broadcast signal is delivered to the MVPDs. The MVPDs report their subscriber numbers to the Company on a 30- to 60-day lag, which coincides with their payment of the fees due to the Company. Prior to receiving the report from the MVPDs, the Company records revenue based on estimated subscribers and the monthly amount the Company is entitled to receive per subscriber. The impact of the lag in the number of subscribers is not significant.
The above revenue recognition policies are consistent with the Company’s historical accounting policies prior to the adoption of ASC 606.
Effective on January 1, 2018, the Company no longer recognizes barter revenue (and the related barter expense) resulting from the exchange of advertising time for certain program material. During the three months ended June 30, 2017, barter revenue (and the related barter expense) was $
Under the Company’s historical accounting policy prior to the adoption of ASC 606, barter revenue (and the related barter expense) would have been $
The Company elected to utilize the practical expedient around costs incurred to obtain a contract due to their short-term nature. Additionally, the incremental benefit from efforts in acquiring these contracts is considered not significant. Thus, the Company continued to expense sales commissions when incurred.
The Company did not disclose the value of unsatisfied performance obligations on its contracts with customers because they are either (i) contracts with an original expected term of one year or less, or (ii) contracts for which the sales- or usage-based royalty exception was applied.
See Note 7 for additional disclosures on revenue from contracts with customers.
Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, broadcast rights payable, accounts payable and accrued expenses approximate fair value due to their short-term nature. See Note 6 for fair value disclosures related to the Company’s debt.
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 shareholders’ deficit as previously reported.
5
Recent Accounting Pronouncements
New Accounting Standards Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company adopted this standard and all related amendments effective January 1, 2018 using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. Upon adoption of this standard, the cumulative adjustment to the Company’s accumulated deficit as of January 1, 2018 for the cumulative effect of initially applying the new standard is not material.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has applied the change in accounting as of January 1, 2018. The adoption of ASU 2016-15 did not impact the Company's Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. To be considered a business under the new guidance, it must include an input and a substantive process that together significantly contribute to the ability to create output. The amendment removes the evaluation of whether a market participant could replace missing elements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and will be applied prospectively. The Company has applied this change in accounting as of January 1, 2018. The adoption of ASU 2017-01 did not impact the Company's Financial Statements.
New Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This new guidance requires the recording of assets and liabilities arising from leases on the balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. ASU 2016-02 is expected to provide transparency of information and comparability among organizations. In January 2018, the FASB issued ASU No. 2018-01 to address the accounting treatment of land easements within the context of ASU No. 2016-02, Leases (Topic 842). ASU 2018-01 provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. In July 2018, the FASB issued ASU No. 2018-10 to provide additional clarity on specific aspects of the new lease guidance. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the provisions of ASU 2018-01.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”).” The standard requires entities to estimate loss of financial assets measured at amortized cost, including trade receivables, debt securities and loans, using an expected credit loss model. The expected credit loss differs from the previous incurred losses model primarily in that the loss recognition threshold of “probable” has been eliminated and that expected loss should consider reasonable and supportable forecasts in addition to the previously considered past events and current conditions. Additionally, the guidance requires additional disclosures related to the further disaggregation of information related to the credit quality of financial assets by year of the asset’s origination for as many as five years. Entities must apply the standard provision as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2016-13 on its financial statements.
3. Local Service Agreements with Nexstar
The Company has entered into local service agreements with Nexstar to provide sales and/or operating services to all of its stations. For the stations with a shared services agreement (“SSA”), the Nexstar station in the market provides certain services including news production, technical maintenance and security, in exchange for monthly payments to Nexstar. For each station with which the Company has entered into a SSA, it has also entered into a JSA, whereby Nexstar sells certain advertising time of the station and retains a percentage of the related revenue. For the stations with a time brokerage agreement (“TBA”), Nexstar programs most of the station’s broadcast time, sells the station’s advertising time and retains the advertising revenue it generates in exchange for monthly payments to Mission, based on the station’s monthly operating expenses. JSA and TBA fees generated from Nexstar under the agreements are reported as “Revenue from Nexstar Broadcasting, Inc.,” and SSA fees incurred by Mission under the agreements are reported as “Fees incurred pursuant to local service agreements with Nexstar Broadcasting, Inc.” in the accompanying Condensed Statements of Operations.
6
Under these agreements, Mission is responsible for certain operating expenses of its stations and therefore may have unlimited exposure to any potential operating losses. Mission will continue to operate its stations under the SSAs and JSAs or TBAs until the termination of such agreements. The local service agreements generally have a term of eight to
Under the local service agreements, Nexstar receives substantially all of the Company’s available cash, after satisfaction of operating costs and debt obligations. The Company anticipates that Nexstar will continue to receive substantially all of its available cash, after satisfaction of operating costs and debt obligations. In compliance with FCC regulations for both the Company and Nexstar, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations. Mission had the following local service agreements in effect with Nexstar as of June 30, 2018:
|
Service Agreements |
|
Full Power Stations |
|
TBA Only |
|
WFXP, KHMT and KFQX |
|
SSA & JSA |
|
KJTL, KLRT, KASN, KOLR, KCIT, KAMC, KRBC, KSAN, WUTR, WAWV, WYOU, KODE, WTVO, KTVE, WTVW and WVNY |
4. Intangible Assets and Goodwill
Intangible assets subject to amortization consisted of the following (in thousands):
|
|
|
Estimated |
|
|
June 30, 2018 |
|
|
December 31, 2017 |
|
|||||||||||||||||||
|
|
|
useful life, |
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|
|
|
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Accumulated |
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|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|||
|
|
|
in years |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|||||||
|
Network affiliation agreements |
|
|
15 |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Other definite-lived intangible assets |
|
1-15 |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
Other intangible assets |
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The following table presents the Company’s estimate of amortization expense for the remainder of 2018, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of June 30, 2018 (in thousands):
|
Remainder of 2018 |
|
$ |
|
|
|
2019 |
|
|
|
|
|
2020 |
|
|
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
$ |
|
|
The carrying amounts of goodwill and FCC licenses were as follows (in thousands):
|
|
|
Goodwill |
|
|
FCC Licenses |
|
||||||||||||||||||
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Accumulated |
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|
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Accumulated |
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||
|
|
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Gross |
|
|
Impairment |
|
|
Net |
|
|
Gross |
|
|
Impairment |
|
|
Net |
|
||||||
|
Balances as of December 31, 2017 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Balances as of June 30, 2018 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Indefinite-lived intangible assets are not subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that such assets might be impaired. During the three and six months ended June 30, 2018, the Company did not identify any events that would trigger an impairment assessment.
7
5. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
2018 |
|
|
2017 |
|
||
|
Network affiliation fees |
|
$ |
|
|
|
$ |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
6. Debt
Long-term debt consisted of the following (in thousands):
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
2018 |
|
|
2017 |
|
||
|
Term loans, net of financing costs and discount of $ |
|
$ |
|
|
|
$ |
|
|
|
Less: current portion |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
2018 Transactions
Through June 30, 2018, Mission repaid scheduled maturities of $
Unused Commitments and Borrowing Availability
As of June 30, 2018, the Company had a $
Collateralization and Guarantees of Debt
Nexstar guarantees full payment of all obligations under the Mission senior secured credit facility in the event of Mission’s default. Similarly, Mission is a guarantor of Nexstar’s senior secured credit facility, the $
The 5.625% Notes and the 6.125% Notes are general senior unsecured obligations subordinated to all of Mission’s senior secured debt. In the event that Nexstar is unable to repay amounts due under these debt obligations, the Company will be obligated to repay such amounts. The maximum potential amount of future payments that Mission would be required to make under these guarantees would be generally limited to the amount of borrowings outstanding under Nexstar’s senior secured credit facility, the
Debt Covenants
The Mission term loan does not require financial covenant ratios but does provide for default in the event Nexstar does not comply with all covenants contained in its credit agreement. Nexstar was in compliance with its financial covenants as of June 30, 2018.
Fair Value of Debt
The aggregate carrying amounts and estimated fair values of the Company’s debt were as follows (in thousands):
|
|
|
June 30, 2018 |
|
|
December 31, 2017 |
|
||||||||||
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
||||
|
Term loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
8
The fair values of the term loans are computed based on borrowing rates currently available to Mission 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.
7. Revenue
As discussed in Note 2, the Company adopted the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all related amendments. ASC 606 establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services and requires significantly enhanced revenue disclosures. The Company adopted this standard effective January 1, 2018 using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning after January 1, 2018 is presented under ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 606. Upon adoption of this standard, the cumulative adjustment to the Company’s accumulated deficit as of January 1, 2018 for the cumulative effect of initially applying the new standard was not material. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The following are additional disclosures about the Company’s revenue under ASC 606.
Contract Balance
Contract balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs. As of each of June 30, 2018 and January 1, 2018, the Company had
Disaggregation of Revenues
The following table presents the disaggregation of our revenue for the three and six months ended June 30, 2018 under ASC 606. Comparative 2017 revenues are presented in accordance with the Company’s historical accounting standard prior to the adoption of ASC 606 (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
|
Retransmission compensation |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barter revenue |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Revenue from Nexstar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Revenue from Nexstar is directly correlated to the advertising revenue earned at the Company’s stations and 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 in return for the consent to the retransmission of the signals of its television stations. Retransmission compensation is recognized at the point in time the broadcast signal is delivered to the MVPDs and is based on a price per subscriber.
Beginning in 2018, the Company
8. Income Taxes
During the three months ended June 30, 2018, we recognized an income tax benefit of $
9
In 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law which reduces the federal corporate income tax rate from
9. 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. 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 and the television broadcast industry in general.
The FCC has adopted rules with respect to the final conversion of existing low power and television translator stations to digital operations, which must be completed by July 2021.
Media Ownership
The FCC is required to review its media ownership rules every four years and to eliminate those rules it finds no longer serve the “public interest, convenience and necessity.”
In August 2016, the FCC adopted a Second Report and Order (the “2016 Ownership Order”) concluding the agency’s 2010 and 2014 quadrennial reviews. The 2016 Ownership Order (1) retained the then-existing local television ownership rule and radio/television cross-ownership rule with minor technical modifications, (2) extended the ban on common ownership of two top four television stations in a market to network affiliation swaps, (3) retained the then-existing ban on newspaper/broadcast cross-ownership in local markets while considering waivers and providing an exception for failed or failing entities, (4) retained the dual network rule, (5) made JSA relationships attributable interests and (6) defined a category of sharing agreements designated as SSAs between stations and required public disclosure of those SSAs (while not considering them attributable).
The 2016 Ownership Order reinstated a 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 (this rule had been previously adopted in 2014 but was vacated by the U.S. Court of Appeals for the Third Circuit). Parties to JSAs entered into prior to March 31, 2014 were permitted to continue to operate under those JSAs until September 30, 2025.
Various parties filed petitions seeking reconsideration of various aspects of the 2016 Ownership Order. On November 16, 2017, the FCC adopted an order (the “Reconsideration Order”) addressing the petitions for reconsideration. The Reconsideration Order (1) eliminated the rules prohibiting newspaper/broadcast cross-ownership and limiting television/radio cross-ownership, (2) eliminated the requirement that eight or more independently-owned television stations remain in a local market for common ownership of two television stations in that market to be permissible, (3) retained the general prohibition on common ownership of two “top four” stations in a local market but provided for case-by-case review, (4) eliminated the television JSA attribution rule, and (5) retained the SSA definition and disclosure requirement for television stations. These rule modifications took effect on February 7, 2018, when the U.S. Court of Appeals for the Third Circuit denied a mandamus petition which had sought to stay their effectiveness. The Reconsideration Order remains subject to appeals before the Third Circuit.
On February 3, 2017, the FCC terminated in full its guidance (issued on March 12, 2014) requiring careful scrutiny of broadcast television applications which propose sharing arrangements and contingent interests.
10
The FCC’s media ownership rules limit the percentage of U.S. television households which a party may reach through its attributable interests in television stations to
Spectrum
The FCC is in the process of repurposing a portion of the broadcast television spectrum for wireless broadband use. Pursuant to federal legislation enacted in 2012, the FCC has conducted an incentive auction for the purpose of making additional spectrum available to meet future wireless broadband needs. Under the auction statute and rules, certain television broadcasters accepted bids from the FCC to voluntarily relinquish all or part of their spectrum in exchange for consideration, and certain wireless broadband providers and other entities submitted successful bids to acquire the relinquished television spectrum. Over the next several years, television stations that are not relinquishing their spectrum will be “repacked” into the frequency band still remaining for television broadcast use.
The incentive auction commenced on March 29, 2016 and officially concluded on April 13, 2017. None of the Company’s television stations accepted bids to relinquish their television channels.
The reallocation of television spectrum to broadband use may be to the detriment of the Company’s investment in digital facilities, could require substantial additional investment to continue current operations and may require viewers to invest in additional equipment or subscription services to continue receiving broadcast television signals. The Company cannot predict the impact of the incentive auction and subsequent repacking on its business.
Retransmission Consent
On March 3, 2011, the FCC initiated a Notice of Proposed Rulemaking 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.
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.
11
Further, certain online video distributors and other over-the-top video distributors (“OTTDs”) have begun streaming broadcast programming over the Internet. In June 2014, the U.S. Supreme Court held that an OTTD’s retransmissions of broadcast television signals without the consent of the broadcast station violate copyright holders’ exclusive right to perform their works publicly as provided under the Copyright Act. In December 2014, the FCC issued a Notice of Proposed Rulemaking proposing to interpret the term “MVPD” to encompass OTTDs that make available for purchase multiple streams of video programming distributed at a prescheduled time and seeking comment on the effects of applying MVPD rules to such OTTDs. Comments and reply comments were filed in 2015. Although the FCC has not classified OTTDs as MVPDs to date, several OTTDs have signed agreements for retransmission of local stations within their markets and others are actively seeking to negotiate such agreements.
10. Commitments and Contingencies
Guarantee of Nexstar Debt
Mission is a guarantor of and has pledged substantially all its assets, excluding FCC licenses, to guarantee Nexstar’s credit facility. Mission is also a guarantor of Nexstar’s 6.125% Notes and Nexstar’s 5.625% Notes.
The 6.125% Notes and the 5.625% Notes are general senior unsecured obligations subordinated to all of Mission’s senior secured debt. In the event that Nexstar is unable to repay amounts due under these debt obligations, Mission will be obligated to repay such amounts. The maximum potential amount of future payments that Mission would be required to make under these guarantees would be generally limited to the amount of borrowings outstanding under Nexstar’s senior secured credit facility, the
On July 2, 2018, Nexstar prepaid $
On July 27, 2018, Nexstar reallocated $
On August 1, 2018, Nexstar prepaid $
Purchase Options Granted to Nexstar
In consideration of the guarantee of Mission’s bank credit facility by Nexstar Media Group, Inc. and its subsidiaries, Mission has granted Nexstar purchase options to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent, for consideration equal to the greater of (1) seven times the station’s cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. Cash flow is defined as income or loss from operations, plus depreciation and amortization (including amortization of broadcast rights), interest income, non-cash trade and barter expenses, nonrecurring expenses (including time brokerage agreement fees), network compensation payments received or receivable and corporate management fees, less payments for broadcast rights, non-cash trade and barter revenue and network compensation revenue. Additionally, Mission’s shareholders have granted Nexstar an option to purchase any or all of the Company’s stock, subject to FCC consent, for a price equal to the pro rata portion of the greater of (1) five times the Mission stations’ cash flow, as defined in the agreement, reduced by the amount of indebtedness, as defined in the agreement, or (2) $
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 other 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.
12
Litigation
From time to time, the Company is involved with claims that arise out of the normal course of business. In the opinion of management, any resulting liability with respect to these claims would not have a material adverse effect on the Company’s financial position or results of operations.
13
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 Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the Financial Statements and related Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2017. Throughout this discussion, all references to “Mission,” “we,” “our,” “us” and the “Company” refer to Mission Broadcasting, Inc.
Overview of Operations
As of June 30, 2018, we owned and operated 19 full power television stations in 18 markets in the states of Arkansas, Colorado, Illinois, Indiana, Louisiana, Missouri, Montana, New York, Pennsylvania, Texas and Vermont. Our stations are affiliated with ABC, FOX, NBC, CBS and The CW. We have local service agreements with certain television stations owned by Nexstar, through which Nexstar provides various programming, sales or other services to our television stations. In compliance with FCC regulations for both Nexstar and us, we maintain complete responsibility for and control over programming, finances and personnel for our stations.
The following table summarizes the various local service agreements our stations had in effect as of June 30, 2018 with Nexstar:
|
Service Agreements |
|
Full Power Stations |
|
TBA Only |
|
WFXP, KHMT and KFQX |
|
SSA & JSA |
|
KJTL, KLRT, KASN, KOLR, KCIT, KAMC, KRBC, KSAN, WUTR, WAWV, WYOU, KODE, WTVO, KTVE, WTVW and WVNY |
Under the local service agreements, Nexstar has received substantially all of our available cash, after satisfaction of operating costs and debt obligations. We anticipate that Nexstar will continue to receive substantially all of our available cash, after satisfaction of operating costs and debt obligations. For more information about our local service agreements with Nexstar, refer to Note 3 of our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The operating revenue of our stations is derived primarily from revenues earned under our retransmission agreements with MVPDs and broadcast advertising revenue sold and collected by Nexstar and paid to us under JSAs. Broadcast advertising revenue is affected by a number of factors, including the economic conditions of the markets in which we operate, the demographic makeup of those markets and the marketing strategy employed in each market. Advertising revenue is positively affected by strong local economies, national and regional political campaigns, and certain events such as the Olympic Games or the Super Bowl. The 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 from advertising aired during the Olympic Games. As 2018 is an election year and Olympic year, we expect an increase in advertising revenues to be reported in 2018 compared to 2017.
We earn revenues from local cable providers and other MVPDs for the retransmission of our broadcasts. These revenues are generally earned based on a price per subscriber of the MVPD within the retransmission area. We have been successful at negotiating favorable pricing with MVPDs, as well as signing retransmission agreements with additional MVPDs, driving significant revenue gains over the last few years.
Most of our stations have network affiliation agreements pursuant to which the networks provide programming to the stations during specified time periods, including prime time, in exchange for network affiliation fees and the right to sell a portion of the advertising time during these broadcasts.
Our primary operating expenses include network affiliation costs, which can vary based on our broadcast programming and retransmission subscribers, and fixed monthly SSA fees paid to Nexstar for news production and technical and other services. To a lesser extent, our operating expenses include employee compensation and related benefits. A large percentage of the costs involved in the operation of our stations remains fixed.
14
Regulatory Developments
As a television broadcaster, the Company is highly regulated and its operations require that it retain or renew a variety of government approvals and comply with changing federal regulations. In 2016, the FCC reinstated a rule providing that a television station licensee which sells more than 15 percent of the weekly advertising inventory of another television station in the same Designated Market Area is deemed to have an attributable ownership interest in that station (this rule had been adopted in 2014 but was vacated by a federal court of appeals). Parties to existing JSAs that were deemed attributable interests and did not comply with the FCC’s local television ownership rule were given until September 30, 2025 to come into compliance. In November 2017, however, the FCC adopted an order on reconsideration that eliminated the rule. That elimination became effective on February 7, 2018, although the FCC’s November 2017 order on reconsideration remains the subject of pending court appeals. If the Company is ultimately required to amend or terminate its existing agreements, the Company could have a reduction in revenue and increased costs if it is unable to successfully implement alternative arrangements that are as beneficial as the existing JSAs.
The FCC is in the process of repurposing a portion of the broadcast television spectrum for wireless broadband use. In an incentive auction which concluded in April 2017, certain television broadcasters accepted bids from the FCC to voluntarily relinquish all or part of their spectrum in exchange for consideration. Television stations that are not relinquishing their spectrum will be “repacked” into the frequency band still remaining for television broadcast use. Seven stations owned by the Company have been assigned to new channels in the reduced post-auction television band and will be required to construct and license the necessary technical modifications to operate on their new assigned channels on a variable schedule ending in July 2020. Congress has allocated up to an industry-wide total of $2.75 billion to reimburse television broadcasters, MVPDs, and other parties for costs reasonably incurred due to the repack. The Company expects to incur costs between now and July 2020 in connection with the repack, some or all of which will be reimbursable. If the FCC fails to fully reimburse the Company’s repacking costs, the Company could have increased costs related to the repacking.
Historical Performance
Revenue
The following table sets forth the principal types of revenue earned by our stations (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
|
Retransmission compensation |
|
$ |
17,231 |
|
|
$ |
16,362 |
|
|
$ |
33,135 |
|
|
$ |
33,154 |
|
|
Other |
|
|
375 |
|
|
|
181 |
|
|
|
628 |
|
|
|
301 |
|
|
Barter revenue |
|
|
- |
|
|
|
1,013 |
|
|
|
- |
|
|
|
2,008 |
|
|
Revenue from Nexstar |
|
|
9,058 |
|
|
|
9,400 |
|
|
|
17,486 |
|
|
|
18,188 |
|
|
Net revenue |
|
$ |
26,664 |
|
|
$ |
26,956 |
|
|
$ |
51,249 |
|
|
$ |
53,651 |
|
On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, the new revenue accounting guidance issued by the FASB. The adoption resulted in certain changes in our revenue recognition policies and the presentation of certain revenue sources. Beginning in 2018, the Company no longer recognizes barter revenue (and the related barter expense) resulting from the exchange of advertising time for certain program material. Under the Company’s historical accounting policy prior to the adoption of ASC 606, barter revenue and barter expense would have been $0.8 million and $1.8 million, respectively, during the three and six months ended June 30, 2018.
15
Results of Operations
The following table sets forth a summary of our operations (in thousands) and the components of operating expense as a percentage of net revenue:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||||||||||||||||||
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
||||||||
|
Net revenue |
|
$ |
26,664 |
|
|
|
100.0 |
|
|
$ |
26,956 |
|
|
|
100.0 |
|
|
|
51,249 |
|
|
|
100.0 |
|
|
|
53,651 |
|
|
|
100.0 |
|
|
Operating expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
|
448 |
|
|
|
1.7 |
|
|
|
315 |
|
|
|
1.2 |
|
|
|
953 |
|
|
|
1.9 |
|
|
|
620 |
|
|
|
1.2 |
|
|
Station direct operating expenses |
|
|
10,013 |
|
|
|
37.6 |
|
|
|
8,895 |
|
|
|
33.0 |
|
|
|
20,160 |
|
|
|
39.3 |
|
|
|
17,894 |
|
|
|
33.4 |
|
|
Selling, general and administrative expenses, excluding corporate |
|
|
664 |
|
|
|
2.5 |
|
|
|
561 |
|
|
|
2.1 |
|
|
|
1,375 |
|
|
|
2.7 |
|
|
|
1,215 |
|
|
|
2.3 |
|
|
Fees incurred pursuant to local service agreements with Nexstar |
|
|
13,250 |
|
|
|
49.7 |
|
|
|
4,500 |
|
|
|
16.7 |
|
|
|
26,500 |
|
|
|
51.7 |
|
|
|
9,000 |
|
|
|
16.8 |
|
|
Barter expense |
|
|
- |
|
|
|
- |
|
|
|
1,014 |
|
|
|
3.7 |
|
|
|
- |
|
|
|
- |
|
|
|
2,008 |
|
|
|
3.7 |
|
|
Depreciation |
|
|
504 |
|
|
|
1.9 |
|
|
|
587 |
|
|
|
2.2 |
|
|
|
1,021 |
|
|
|
2.0 |
|
|
|
1,175 |
|
|
|
2.2 |
|
|
Amortization of intangible assets |
|
|
540 |
|
|
|
2.0 |
|
|
|
639 |
|
|
|
2.4 |
|
|
|
1,084 |
|
|
|
2.1 |
|
|
|
1,244 |
|
|
|
2.3 |
|
|
Amortization of broadcast rights, excluding barter |
|
|
409 |
|
|
|
1.5 |
|
|
|
400 |
|
|
|
1.4 |
|
|
|
821 |
|
|
|
- |
|
|
|
804 |
|
|
|
1.4 |
|
|
Reimbursement from the FCC related to station repack |
|
|
(187 |
) |
|
|
(0.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
(187 |
) |
|
|
(0.4 |
) |
|
|
- |
|
|
|
- |
|
|
Total operating expenses |
|
|
25,641 |
|
|
|
|
|
|
|
16,911 |
|
|
|
|
|
|
|
51,727 |
|
|
|
|
|
|
|
33,960 |
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
1,023 |
|
|
|
|
|
|
$ |
10,045 |
|
|
|
|
|
|
$ |
(478 |
) |
|
|
|
|
|
$ |
19,691 |
|
|
|
|
|
16
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Revenue
Net revenue for the three months ended June 30, 2018 decreased by $0.3 million, or 1.1%, from the same period in 2017.
Revenue from Nexstar was $9.1 million for the three months ended June 30, 2018, compared to $9.4 million for the same period in 2017, a decrease of $0.3 million, or 3.6%, due to decreased local and national advertising partially offset by increased political advertising from our stations.
Compensation from retransmission consent was $17.2 million for the three months ended June 30, 2018, compared to $16.4 million for the same period in 2017, an increase of $0.8 million, or 5.3%. The increase was primarily due to scheduled annual escalation of rates per subscriber and the renewals of smaller contracts providing for higher rates per subscriber (contracts generally have a three-year term). Broadcasters currently deliver approximately 35% of all television viewing audiences but are paid approximately 12-14% of the total basic cable programming fees. We anticipate continued increase of retransmission fees until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.
Operating Expenses
Corporate expenses, costs associated with the centralized management of our stations, were $0.4 million for the three months ended June 30, 2018, compared to $0.3 million for the same period in 2017, an increase of $0.1 million, or 42.2%. The increase was primarily due to an increase in payroll expenses of $0.1 million due to renegotiated employment contracts effective July 1, 2017.
Station direct operating expenses, consisting primarily of news, engineering and programming, and station selling, general and administrative expenses were $10.7 million for the three months ended June 30, 2018, compared to $9.5 million for the same period in 2017, an increase of $1.2 million, or 12.9%. The increase was primarily due to an increase in programming costs of $1.1 million primarily related to network affiliation agreements. Network affiliation fees have been increasing industry wide and will continue to increase over the next several years.
Local service agreement fees associated with Nexstar relate to services provided by Nexstar in the production of newscasts, technical maintenance, promotional and administrative support under the SSAs. On July 1, 2017, we and Nexstar amended the shared services agreements resulting in an increase in the recurring SSA fees. The local service agreement fees for the three months ended June 30, 2018 were $13.3 million, compared to $4.5 million for the same period in 2017, or an increase of $8.8 million.
Depreciation of property and equipment was consistent at $0.5 million for the three months ended June 30, 2018, compared to $0.6 for the same period in 2017.
Amortization of intangible assets was consistent at $0.5 million for the three months ended June 30, 2018 compared to $0.6 million for the same period in 2017.
Interest Expense
Interest expense was $2.7 million for the three months ended June 30, 2018, compared to $2.6 million for the same period in 2017, an increase of $0.1 million primarily due to an increasing trend in the London Interbank Offered Rate (“LIBOR”).
Income Taxes
During the three months ended June 30, 2018, we recognized an income tax benefit of $0.4 million on a pre-tax book loss of $1.7 million resulting in an effective tax rate of 24.8% as compared to an income tax expense of $2.9 million on pre-tax book income of $7.5 million for the same period in 2017 resulting in an effective tax rate of 39.0%. In 2017, the Tax Act was signed into law which reduces the federal corporate income tax rate from 35% to 21%. This resulted in a decrease to the effective rate in the three months ended June 30, 2018 compared to the three months ended June 30, 2017 of 14.0%.
17
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Revenue
Net revenue for the six months ended June 30, 2018 decreased by $2.4 million, or 4.5%, from the same period in 2017.
Revenue from Nexstar was $17.5 million for the six months ended June 30, 2018, compared to $18.2 million for the same period in 2017, a decrease of $0.7 million, or 3.9%, due to decreased local and national advertising partially offset by increased political advertising from our stations.
Compensation from retransmission consent was consistent at $33.1 million for each of the six months ended June 30, 2018 and 2017.
Operating Expenses
Corporate expenses were $1.0 million for the six months ended June 30, 2018, compared to $0.6 million for the same period in 2017, an increase of $0.3 million, or 53.7%. The increase was primarily due to an increase in payroll expenses of $0.2 million due to renegotiated employment contracts effective July 1, 2017 and an increase in professional services of $0.1 million, resulting from the timing of services performed.
Station direct operating expenses, consisting primarily of news, engineering and programming, and station selling, general and administrative expenses were $21.5 million for the six months ended June 30, 2018, compared to $19.1 million for the same period in 2017, an increase of $2.4 million, or 12.7%. The increase was primarily due to an increase in programming costs of $2.2 million primarily related to network affiliation agreements. Network affiliation fees have been increasing industry wide and will continue to increase over the next several years.
Local service agreement fees associated with Nexstar relate to services provided by Nexstar in the production of newscasts, technical maintenance, promotional and administrative support under the SSAs. On July 1, 2017, we and Nexstar amended the shared services agreements resulting in an increase in the recurring SSA fees. SSA fees were $26.5 million for the six months ended June 30, 2018, compared to $9.0 million for the same period in 2017, an increase of $17.5 million.
Depreciation of property and equipment was consistent at $1.0 million for the six months ended June 30, 2018, compared to $1.2 million in the same period in 2017.
Amortization of intangible assets was consistent at $1.1 million for the six months ended June 30, 2018, compared to $1.2 million in the same period in 2017.
Interest Expense
Interest expense was $5.4 million for the six months ended June 30, 2018, compared to $5.2 million for the same period in 2017, an increase of $0.1 million primarily due to an increasing trend in LIBOR.
Loss on Extinguishment of Debt
In 2017, we refinanced our term loans and revolving loans which resulted in loss on debt extinguishment of $2.1 million, representing the write-off of unamortized debt financing costs and debt discounts associated with this debt extinguishment.
Income Taxes
During the six months ended June 30, 2018, we recognized an income tax benefit of $1.4 million on a pre-tax book loss of $5.8 million resulting in an effective tax rate of 24.1% as compared to an income tax expense of $4.8 million on pre-tax book income of $12.3 million for the same period in 2017 resulting in an effective tax rate of 38.8%. In 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law which reduces the federal corporate income tax rate from 35% to 21%. This resulted in a decrease to the effective rate in the six months ended June 30, 2018 compared to the six months ended June 30, 2017 of 14.0%.
18
Liquidity and Capital Resources
We are highly leveraged, which makes us vulnerable to changes in general economic conditions. Our ability to meet the future cash requirements described below depends on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other conditions, many of which are beyond our control. Our ability to meet future cash requirements is also dependent upon the local service agreements we have entered into with Nexstar. Under our local service agreements, Nexstar sells our advertising time and pays us a percentage of the amount collected. The payments we receive from Nexstar are a significant component of our cash flows. On March 23, 2018, Nexstar represented to us that it will continue the various local service agreements under which it provides sales and other services to our television stations, thereby providing financial support to enable us to continue to operate as a going concern. We believe that with Nexstar’s pledge to continue the local service agreements, our available cash, anticipated cash flow from operations and available borrowings under our senior secured credit facility should be sufficient to fund working capital, capital expenditure requirements, interest payments and scheduled debt principal payments for at least the next 12 months from August 10, 2018. In order to meet future cash needs we may, from time to time, borrow under our existing senior secured credit facility. We will continue to evaluate the best use of our operating cash flow among capital expenditures and debt reduction.
Overview
The following tables present summarized financial information management believes is helpful in evaluating our liquidity and capital resources (in thousands):
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2018 |
|
|
2017 |
|
||
|
Net cash used in operating activities |
|
$ |
(1,298 |
) |
|
$ |
(752 |
) |
|
Net cash used in investing activities |
|
|
(512 |
) |
|
|
(982 |
) |
|
Net cash (used in) provided by financing activities |
|
|
(1,157 |
) |
|
|
1,169 |
|
|
Net decrease in cash and cash equivalents |
|
$ |
(2,967 |
) |
|
$ |
(565 |
) |
|
Cash paid for interest |
|
$ |
4,845 |
|
|
$ |
5,572 |
|
|
Cash paid for income taxes, net of refunds |
|
$ |
105 |
|
|
$ |
974 |
|
|
|
|
As of |
|
|
As of |
|
||
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
2018 |
|
|
2017 |
|
||
|
Cash and cash equivalents |
|
$ |
6,557 |
|
|
$ |
9,524 |
|
|
Long-term debt including current portion |
|
|
224,965 |
|
|
|
225,742 |
|
|
Unused revolving loan commitments under senior secured credit facilities |
|
|
3,000 |
|
|
|
3,000 |
|
Cash Flows – Operating Activities
Net cash flows used in operating activities were $1.3 million during the six months ended June 30, 2018, compared to $0.8 million for the same period in 2017, an increase of $0.5 million. This was primarily due to a decrease in net revenue (excluding barter) of $0.4 million.
Cash Flows – Investing Activities
Net cash flows used in investing activities were $0.5 million during the six months ended June 30, 2018, compared to $1.0 million for the same period in 2017. In 2018, we paid $0.5 million in capital expenditures, an increase of $0.3 million compared to the same period in 2017, primarily related to station repacking costs. In 2017, we paid $0.8 million to acquire a station.
Cash Flows – Financing Activities
Net cash flows used in financing activities during the six months ended June 30, 2018 were $1.2 million compared to net cash flows provided by financing activities of $1.2 million during the same period in 2017. In 2018, we paid the scheduled principal maturities under our term loan of $1.2 million. In 2017, we issued new long-term debt of $230.8 million, net of debt discount, repaid the principal balance under our term loan of $225.9 million and paid financing costs of $3.8 million.
Our senior secured credit facility restricts but does not prohibit the payment of cash dividends to our shareholders.
19
Future Sources of Financing and Debt Service Requirements
As of June 30, 2018, we had total debt of $225.0 million which represented 109.6% of our total capitalization. Our high level of debt requires that a substantial portion of cash flow be dedicated to pay principal and interest on our debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.
The total amount of borrowings available to us under our revolving credit facility is based on covenant calculations contained in Nexstar’s credit agreement. As of June 30, 2018, we have $3.0 million of unused revolving loan commitment under our senior secured credit facility.
The following table summarizes the approximate aggregate amount of principal indebtedness scheduled to mature for the periods referenced as of June 30, 2018 (in thousands):
|
|
|
Total |
|
|
Remainder of 2018 |
|
|
2019-2020 |
|
|
2021-2022 |
|
|
Thereafter |
|
|||||
|
Senior secured credit facility |
|
$ |
229,683 |
|
|
$ |
1,157 |
|
|
$ |
4,628 |
|
|
$ |
4,628 |
|
|
$ |
219,270 |
|
Interest payments on our senior secured credit facility are generally paid every one to three months and are payable based on the type of interest rate selected.
The terms of our senior secured credit facility limit, but do not prohibit, us from incurring substantial amounts of additional debt in the future.
We do not have any rating downgrade triggers that would accelerate the maturity dates of our debt. However, a downgrade in our credit rating could adversely affect our ability to renew existing or obtain access to new credit facilities or otherwise issue debt in the future and could increase the cost of such debt.
Collateralization and Guarantees of Debt
Nexstar guarantees full payment of all obligations under our senior secured credit facility in the event of our default. Similarly, we are a guarantor of Nexstar’s senior secured credit facility, the $900.0 million 5.625% Notes issued by Nexstar and the $275.0 million 6.125% Notes issued by Nexstar. The senior secured credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and us.
The 5.625% Notes and the 6.125% Notes are general senior unsecured obligations subordinated to all of our senior secured debt. In the event that Nexstar is unable to repay amounts due under these debt obligations, we will be obligated to repay such amounts. The maximum potential amount of future payments that we would be required to make under these guarantees would be generally limited to the amount of borrowings outstanding under Nexstar’s senior secured credit facility, the 5.625% Notes, and the 6.125% Notes. As of June 30, 2018, Nexstar had $887.3 million outstanding obligations under its 5.625% Notes, $273.2 million outstanding obligations under its 6.125% Notes and a maximum commitment of $2.589 billion under its senior secured credit facility, of which $1.727 billion in Term Loan B and $693.4 million in Term Loan A were outstanding.
On July 2, 2018, Nexstar prepaid $50.0 million of the outstanding principal under its term loans, funded by cash on hand.
On July 27, 2018, Nexstar reallocated $5.6 million of its unused revolving loan credit facility to Marshall.
On August 1, 2018, Nexstar prepaid $35.0 million of the outstanding principal under its term loans, funded by cash on hand.
20
Debt Covenants
Our ability to continue as a going concern is dependent on Nexstar’s pledge to continue the local service agreements described in a letter of support dated March 23, 2018. Our senior secured credit facility agreement does not contain financial covenant ratio requirements; however, it does include an event of default if Nexstar does not comply with all covenants contained in its credit agreement. Nexstar’s senior secured credit facility agreement contains covenants which require Nexstar to comply with certain financial ratios, including (a) a maximum consolidated total net leverage ratio, (b) a maximum consolidated first lien net leverage ratio, and (c) a minimum consolidated fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar and us. The indentures governing Nexstar’s 5.625% Notes and 6.125% Notes contain restrictive covenants customary for borrowing arrangements of these types. As of June 30, 2018, Nexstar informed us that it was in compliance with all covenants contained in the credit agreement governing its senior secured credit facility and the indentures governing its 5.625% Notes and 6.125% Notes.
No Off-Balance Sheet Arrangements
As of June 30, 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Critical Accounting Policies and Estimates
Our Condensed 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 at the date of the Condensed Financial Statements and reported amounts of revenue and expenses during the period. On an ongoing basis, we evaluate our estimates, including those related to goodwill and intangible assets, bad debts, broadcast rights, trade and barter, income taxes, commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year.
Information with respect to our critical accounting policies which we believe could have the most significant effect on our 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, 2017. Management believes that as of June 30, 2018, there have been no material changes to this information.
Recent Accounting Pronouncements
Refer to Note 2 of our Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our adoption of recently issued accounting pronouncements, including our expected date of adoption and effects on results of operations and financial position.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including: any projections or expectations of earnings, revenue, financial performance, liquidity and capital resources or other financial items; any assumptions or projections about the television broadcasting industry; any statements of our plans, strategies and objectives for our future operations, performance, liquidity and capital resources or other financial items; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and other similar words.
21
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ from a projection or assumption in any of our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties, including those described in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our other filings with the 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.
|
ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. The Company’s exposures to market risk did not change materially since December 31, 2017.
Our term loan borrowings under our senior secured credit facility bear interest at a rate of 4.59% as of June 30, 2018, and the interest rate on the revolving credit facility was 4.09%, which represented the base rate, or LIBOR, plus the applicable margin, as defined. Interest is payable in accordance with the credit agreement.
If LIBOR were to increase by 100 basis points, or one percentage point, from its June 30, 2018 level, our annual interest expense would increase and cash flow from operations would decrease by approximately $2.3 million, based on the outstanding balance of our credit facility as of June 30, 2018. An increase of 50 basis points in LIBOR would increase our annual interest expense and decrease our cash flow from operations by approximately $1.1 million. A decrease of 100 or 50 basis points in LIBOR would decrease our annual interest expense and increase our cash flow from operations by approximately $2.3 million and $1.1 million, respectively. As of June 30, 2018, we have no financial instruments in place to hedge against changes in the benchmark interest rates on our senior secured credit facility.
Impact of Inflation
We believe that our results of operations are not affected by moderate changes in the inflation rate.
|
ITEM 4. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Mission’s management, with the participation of Mission’s President and Treasurer (who is Mission’s principal executive officer and principal financial and accounting officer), conducted an evaluation as of the end of the period covered by this report of the effectiveness of the design and operation of Mission’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based upon that evaluation, Mission’s President and Treasurer concluded that as of the end of the period covered by this report, Mission’s disclosure controls and procedures were effective, at a reasonable assurance level, to ensure that information required to be disclosed by Mission in the reports 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 Mission’s management, including its President and Treasurer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
As of the quarter ended June 30, 2018, there have been no changes in Mission’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
22
PART II. OTHER INFORMATION
|
ITEM 1. |
Legal Proceedings |
From time to time, we are 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, we believe the resulting liabilities would not have a material adverse effect on our financial condition or results of operations.
|
ITEM 1A. |
Risk Factors |
There are no material changes from the risk factors previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2017.
|
ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
|
ITEM 3. |
Defaults Upon Senior Securities |
None.
|
ITEM 4. |
Mine Safety Disclosures |
None.
|
ITEM 5. |
Other Information |
None.
|
ITEM 6. |
Exhibits |
|
Exhibit No. |
|
Description |
|
10.1 |
|
|
|
10.2 |
|
|
|
10.3 |
|
|
|
31.1 |
|
Certification of Dennis Thatcher pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
|
32.1 |
|
Certification of Dennis Thatcher pursuant to 18 U.S.C. ss. 1350 * |
|
101 |
|
The Company’s unaudited Financial Statements and related Notes for the quarter ended June 30, 2018 from this Quarterly Report on Form 10-Q, formatted in iXBRL (Inline eXtensible Business Reporting Language) * |
|
* |
Filed herewith |
23
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.
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MISSION BROADCASTING, INC. |
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/s/ Dennis Thatcher |
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By: |
Dennis Thatcher |
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Its: |
President and Treasurer |
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(Principal Executive Officer and Principal Financial and Accounting Officer) |
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Dated: August 10, 2018