Nexstar Broadcasting Group, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Although the request identifies 2015 Q4, this filing is an annual report; fourth-quarter figures are noted separately below. Financial results include consolidated variable-interest entities (VIEs), despite Nexstar not owning those entities. Comparability with 2014 is significantly affected by acquisitions.
Business context
Nexstar operated, programmed, or provided services to 99 full-power television stations in 61 U.S. markets, reaching an estimated 20.4 million viewers. Revenue came principally from local and national advertising, retransmission-consent fees, and digital media. Nexstar acquired television stations and digital businesses during 2015, including CCA, KASW, KLAS, Yashi, and Kixer.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $896.4 million | $631.3 million |
| Operating income | $206.1 million | $173.2 million |
| Operating margin | 23.0% | 27.4% |
| Income before tax | $125.1 million | $110.7 million |
| Net income attributable to Nexstar | $77.7 million | $64.6 million |
| Diluted EPS | $2.42 | $2.02 |
| Cash from operating activities | $197.3 million | $166.5 million |
| Cash used in investing activities | $474.3 million | $230.0 million |
| Cash from financing activities | $188.6 million | $155.4 million |
- Revenue increased 42.0%, principally reflecting $239.3 million of incremental revenue from acquired stations and entities and higher retransmission compensation. Legacy-station retransmission revenue rose $70.7 million.
- Revenue mix included $369.3 million local advertising, $153.6 million national advertising, $12.7 million political advertising, $298.0 million retransmission compensation, and $89.9 million digital media revenue. Political advertising fell from $64.3 million in 2014 because 2015 was not an election year.
- Operating income rose, but operating margin declined as costs increased. Direct station operating expenses rose with acquisitions and higher network affiliation costs; depreciation and amortization also increased.
- Net interest expense was $80.5 million, versus $62.0 million in 2014. Income tax expense was $48.7 million; the reported effective tax rate was 38.9%.
- Fourth-quarter 2015 revenue was $252.3 million, operating income $67.3 million, net income attributable to Nexstar $27.2 million, and diluted EPS $0.86.
Liquidity, debt, and capital allocation
- At year-end, cash was $43.4 million, working capital $114.0 million, and total debt $1.476 billion. The company reported $103.0 million of unused revolving commitments available under covenant calculations.
- Debt represented 94.8% of combined capitalization. Scheduled principal maturities were $22.1 million in 2016, $198.7 million in 2017–2018, and $997.1 million in 2019–2020, including $525 million of 6.875% notes due 2020.
- Cash interest paid was $70.4 million. A 100-basis-point increase in LIBOR was estimated to add $4.1 million to annual interest expense, based on year-end balances; Nexstar had no interest-rate hedges.
- Nexstar issued $275 million of 6.125% notes due 2022. It repurchased 1,010,565 shares for $48.7 million and paid $23.7 million in dividends during 2015. The annual dividend declared was $0.76 per share; the board raised the quarterly rate to $0.24 beginning in 2016.
- Management stated that cash, expected operating cash flow, and available borrowing capacity should fund working capital, capital spending, interest, and scheduled principal payments for at least the next 12 months, subject to business and market conditions.
Outlook, transactions, and risks
- No specific financial guidance was provided. Management described continued acquisition evaluation, investment in digital products, local programming and sales, and cost control as operating priorities. It expected acquired stations to grow faster than more mature stations.
- In January 2016, Nexstar agreed to acquire Media General for estimated consideration of approximately $2.0 billion in cash and stock, plus a potential spectrum-auction contingent value right. The transaction required shareholder, FCC, and other regulatory approvals; committed financing of up to $4.7 billion was obtained. The companies anticipated closing in late Q3 or early Q4 2016 and expected station divestitures to address ownership limits.
- Other subsequent transactions included the acquisition of four North Dakota stations and the first closing for four West Virginia stations. Remaining West Virginia consideration was expected to be $65 million. The filing also disclosed a pending $3.5 million KCWI acquisition and up to $7 million of potential Kixer earnout payments.
- Key risks include substantial leverage, variable-rate debt and restrictive covenants; dependence on advertising and audience ratings; retransmission-consent negotiations and regulatory changes; FCC ownership, local-service-agreement, and spectrum-repacking rules; and integration and financing risks from acquisitions. The Media General merger could materially increase debt and require divestitures.
- Goodwill and intangible assets were $1.255 billion, or 68.4% of total assets. A digital-media reporting unit with $10.4 million of goodwill passed its impairment test by a narrow margin; the filing cautioned that changed assumptions could result in a future impairment charge.
- Management said ordinary-course litigation was not expected to materially affect financial condition or results. Nexstar reported compliance with debt covenants at December 31, 2015. The auditor expressed unqualified opinions on the financial statements and internal control; acquired businesses representing 20% of 2015 net revenue were excluded from management’s internal-control assessment.
Important facts for investors to verify
- How much of revenue and operating cash flow growth is organic versus attributable to acquired stations and consolidated VIEs.
- Whether retransmission-fee growth can continue amid renewal negotiations, network fee demands, and regulatory changes.
- Debt covenant headroom, refinancing needs, interest-rate exposure, and the financing and pro forma leverage implications of the Media General transaction.
- Required station divestitures, regulatory approvals, transaction timing, and any termination fees associated with the proposed merger.
- Performance of the digital businesses, including the reporting unit with limited goodwill-impairment headroom, and realization of acquisition synergies.
- Whether the increased dividend and continued capital returns remain sustainable alongside acquisition spending and debt service.