Nexstar Media Group, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter filing; fourth-quarter figures below are unaudited supplementary data. Financial statements consolidate certain independently owned variable interest entities (VIEs).
Business context and reporting period
Nexstar operates television stations and digital media businesses. At year-end it owned, operated, programmed, or provided services to 170 full-power stations in 100 markets, reaching an estimated 43.6 million U.S. television households. The January 17, 2017 Media General merger materially expanded the business; therefore, year-over-year results are not directly comparable and revenue growth largely reflects acquired operations.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenue | $2,432.0 million | $1,103.2 million |
| Operating income | $518.7 million | $287.3 million |
| Operating margin | 21.3% | 26.0% |
| Net income attributable to Nexstar | $475.0 million | $91.5 million |
| Diluted EPS | $10.07 | $2.89 |
| Cash from operating activities | $136.7 million | $261.5 million |
| Cash and cash equivalents at year-end | $115.7 million | $87.7 million |
| Total debt at year-end | $4,362.5 million | $2,342.4 million |
- Revenue rose 120.4%. Reported net revenue included $1,412.0 million from acquired stations and entities; management also cited higher retransmission revenue at legacy stations, partly offset by divestitures and weaker legacy advertising in a non-election, non-Olympic year.
- Retransmission compensation was $995.8 million, 39.1% of gross revenue; local advertising was $913.6 million, national advertising $356.6 million, political advertising $31.6 million, and digital media revenue $230.8 million.
- Operating expenses included $159.5 million of intangible amortization, $20.0 million of digital-business impairment charges, and a $57.7 million net gain on station disposals. Interest expense was $241.2 million and debt-extinguishment loss was $34.9 million.
- Net income was substantially boosted by a provisional $322.2 million income-tax benefit from the Tax Cuts and Jobs Act, which remeasured deferred taxes. The company reported a $233.9 million total income-tax benefit for the year; this is not a recurring operating earnings indicator.
- Operating cash flow declined $124.8 million, principally reflecting higher tax payments (including $180.9 million related to spectrum proceeds), increased cash interest, and timing of vendor payments and receivable collections. Investing cash outflow was $2,062.1 million, mainly reflecting the merger; financing cash inflow was $1,953.3 million.
- Year-end working capital was $385.5 million. The company reported $172.0 million of unused revolving commitments available at year-end, subject to covenants. It said available cash, operating cash flow, and borrowing availability should cover anticipated needs for at least the next 12 months.
- Debt represented 73.5% of combined capitalization. Approximately $92.8 million of principal was scheduled for 2018, including $53.0 million of Marshall facility debt due in June 2018. Nexstar reported covenant compliance at year-end.
Fourth-quarter supplementary results
Unaudited Q4 2017 net revenue was $653.7 million, operating income was $140.8 million, and net income attributable to Nexstar was $378.5 million, or $8.27 basic EPS. Q4 2016 comparatives were $309.9 million, $92.5 million, and $20.5 million, or $0.67 basic EPS. The unusually high 2017 Q4 net income reflects the year’s tax benefit, rather than a comparable increase in operating performance.
Material changes versus the prior comparable period
- The Media General merger added 71 full-power stations net of divestitures and substantially increased revenue, debt, assets, depreciation, and amortization. Acquired operations contributed $300.4 million of operating income from the merger date through year-end.
- Retransmission compensation increased 152.7%, including $550.9 million of incremental acquired-station revenue and $64.9 million of growth at legacy stations. Legacy local and national advertising weakened; political revenue fell $76.9 million as 2017 was not an election year.
- Operating margin decreased to 21.3% from 26.0%; comparison is affected by acquisition-related expenses and purchase-accounting amortization.
- Cash from operations fell despite higher reported earnings, reflecting substantial tax and interest cash payments and working-capital timing. Cash interest paid rose to $213.7 million from $99.9 million.
- The company repurchased $99.0 million of shares and paid $55.9 million in dividends in 2017. In February 2018, the board raised the quarterly dividend to $0.375 per share.
Outlook, management commentary, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management expects retransmission fees to continue increasing over time, while also noting that network affiliation fees have been rising and are expected to continue rising.
- The FCC spectrum auction generated $478.6 million of gross proceeds for relinquished Media General spectrum. The company estimated $230.8 million of repacking costs through 2020; reimbursement is uncertain because industry claims exceeded the $1.75 billion authorized fund.
- Key risks include high leverage and variable-rate debt, dependence on advertising and retransmission consent, subscriber declines from cord-cutting, competition from digital media, network-affiliation renewal terms, FCC regulation, and integration or execution risks from acquisitions.
- Digital businesses recorded $20.0 million of impairment charges after reorganizations, operating-forecast shortfalls, and increased competition. Goodwill and intangible assets totaled $5.5 billion, or 73.4% of total assets, creating potential for further impairments.
- The Tax Act accounting was provisional; the company expected to complete its analysis during the second half of 2018. Repatriation, interest-deductibility, executive-compensation, and state-tax interpretation could affect future tax results.
- Subsequent events included the January 2018 LKQD acquisition for an initial $90.0 million, plus up to $35.0 million contingent on 2019 performance, and $20.0 million debt prepayments in February 2018.
- The auditor issued an unqualified opinion on the financial statements and internal control. However, Media General and five acquired VIEs were excluded from the 2017 internal-control assessment; together they represented 58.1% of consolidated revenue.
Important facts for investors to verify
- Separate acquisition-driven growth from organic performance, particularly for retransmission, local advertising, and digital revenue.
- Assess sustainable earnings and cash generation excluding the provisional tax benefit, disposal gains, impairment charges, merger costs, and debt-refinancing losses.
- Review debt maturity, refinancing, covenant headroom, variable-rate exposure, and the near-term Marshall maturity; a 100-basis-point LIBOR increase was estimated to raise annual interest expense by $28.5 million at year-end debt levels.
- Track whether FCC repacking costs are reimbursed and whether the spectrum-related CVR and tax estimates change.
- Monitor digital-business results and impairment assumptions, the tax-law measurement updates, and integration/control processes for acquired operations.