Nexstar Broadcasting Group, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone Q4 report; the filing also provides unaudited quarterly results. Financial statements consolidate Nexstar and certain independently owned variable interest entities (VIEs), including Mission, Marshall and Parker.
Business context
Nexstar operates and provides services to television stations and digital media businesses. At year-end it served 87 stations and 26 digital multicast channels in 49 markets, reaching an estimated 16.2 million viewers. Revenue is primarily from local, national and political advertising, retransmission compensation and digital media.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net revenue | $631.3 million | $502.3 million |
| Income from operations | $173.2 million | $103.2 million |
| Interest expense, net | $62.0 million | $66.2 million |
| Income (loss) before tax | $110.7 million | $0.8 million |
| Income tax expense | $46.1 million | $2.6 million |
| Net income (loss) | $64.6 million | $(1.8) million |
| Diluted earnings (loss) per share | $2.02 | $(0.06) |
| Cash from operating activities | $166.5 million | $27.3 million |
| Cash used in investing activities | $(230.0) million | $(248.1) million |
| Cash from financing activities | $155.4 million | $191.8 million |
- Revenue increased 25.7%. Political advertising rose to $64.3 million from $5.2 million, and retransmission compensation increased 53.2% to $155.0 million. Digital media revenue grew 51.4% to $46.7 million.
- Local advertising was $279.2 million, up 5.2%; national advertising was $109.9 million, down 3.1%. Legacy stations’ local and national advertising revenue declined by $2.4 million; acquisitions contributed materially to growth.
- Operating expenses rose to $458.1 million from $399.1 million, reflecting acquired businesses and higher network programming costs. Operating income increased to $173.2 million from $103.2 million.
- Cash and cash equivalents were $131.9 million at year-end, versus $40.0 million a year earlier. Working capital was $220.4 million; current assets were $317.7 million and current liabilities $97.3 million.
- Total debt was $1.236 billion, up from $1.071 billion; the filing states debt was 95.9% of combined capitalization. Unused revolving commitments were $99.5 million, reported as available subject to covenant compliance. Management believed available cash, operating cash flow and borrowing capacity would cover expected needs for at least 12 months.
- Capital expenditures, net of asset-sale proceeds, were $20.3 million. Dividends declared were $0.60 per share in 2014; the board raised the quarterly dividend to $0.19 per share beginning in 2015.
Q4 and changes versus prior periods
In Q4 2014, revenue was $192.8 million versus $138.1 million in Q4 2013; operating income was $68.9 million versus $32.1 million; and net income was $30.8 million versus a net loss of $12.5 million. For the full year, net income improved from a loss in 2013, when a $34.7 million debt-extinguishment loss substantially affected results. FY 2014 income tax expense also rose sharply from 2013, when pretax income was only $0.8 million.
Acquisitions and consolidation changes limit period-to-period comparability. 2014 transactions included the Citadel stations, digital businesses IBS and ETG, stations from Gray TV and Grant. Marshall and Parker were consolidated as VIEs during 2014. The CCA acquisition and acquisitions of KASW, Yashi and KLAS closed after year-end and therefore were not part of FY 2014 operations.
Outlook, risks and unusual items
- No quantified forward earnings or revenue guidance is provided. Management cited acquisition growth, retransmission revenue and digital expansion, while noting the seasonal and election-sensitive nature of advertising. 2014 was an election and Olympic year.
- Leverage is a significant risk: Nexstar guarantees Mission’s and Marshall’s secured debt, and debt covenants restrict additional borrowing, dividends, acquisitions and other actions. The company reported covenant compliance at year-end and expected continued compliance for at least 12 months.
- Variable-rate debt creates interest-rate exposure. Management estimated a 100-basis-point LIBOR increase would raise annual interest expense and reduce operating cash flow by $3.1 million, based on year-end debt balances; the company had no interest-rate hedges.
- FCC changes could require modification or termination of certain joint sales agreements by December 19, 2016, potentially reducing revenue or increasing costs. Retransmission consent negotiations, media ownership rules, station license renewals and the planned spectrum incentive auction also create regulatory uncertainty.
- Other risks include competition from digital and alternative media, advertising downturns, rising network affiliation fees, acquisition integration, network affiliation renewals, and potential impairment of goodwill and intangible assets. Goodwill and intangible assets totaled $772.7 million, or 52.8% of assets; no 2014 impairment was recorded.
- Federal and state NOL carryforwards were approximately $333.0 million and $69.9 million, respectively. A 2013 ownership change triggered Section 382 limitations on use of Nexstar’s federal NOLs.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reports no unresolved SEC staff comments and no material changes in internal control; the auditor’s report gave an unqualified opinion on the financial statements and internal control.
Important facts for investors to verify
- Reconcile the $1.236 billion year-end debt balance, debt maturities and subsequent $275 million 6.125% notes issuance and acquisition-related borrowings.
- Assess how much reported growth and cash generation came from acquisitions, political advertising and retransmission rate increases versus comparable legacy-station performance.
- Review the terms and FCC status of local service agreements, related guarantees, and the potential effect of JSA and retransmission-consent rule changes.
- Evaluate liquidity and covenant headroom after the 2015 acquisitions, dividend increase and subsequent borrowing; the filing’s liquidity assessment is based on year-end 2014 information.
- Monitor integration, purchase-price allocations and returns from CCA, Grant, KASW, Yashi, KLAS and other acquisitions, as well as the recoverability of goodwill and intangible assets.