Nexstar Broadcasting Group, Inc. — FY 2012 Form 10-K
Period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report. The consolidated results include Mission Broadcasting, an independently owned company that Nexstar consolidates under U.S. GAAP; amounts below are for Nexstar and Mission together unless noted.
Business context and reporting period
Nexstar operates and provides services to television stations and digital media businesses in U.S. local markets. At year-end, it owned, operated, programmed, or provided sales and other services to 64 stations and 14 digital multicast channels across 38 markets, reaching an estimated 11.1% of U.S. television households. Advertising is the principal revenue source; retransmission compensation and digital advertising are also significant.
Key financial results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net revenue | $378.6 million | $306.5 million |
| Income from operations | $99.9 million | $48.0 million |
| Operating margin | 26.4% | 15.7% |
| Income (loss) before tax, continuing operations | $45.1 million | $(6.2) million |
| Net income (loss) | $182.5 million | $(11.9) million |
| Cash from operating activities | $79.9 million | $40.3 million |
| Cash and cash equivalents at year-end | $69.0 million | $7.5 million |
| Working capital at year-end | $105.3 million | $39.6 million |
| Total debt at year-end | $857.6 million | $640.4 million |
FY 2012 net income included a $132.3 million continuing-operations income tax benefit, primarily from releasing $151.4 million of deferred-tax valuation allowance, and a $5.1 million after-tax gain on the KBTV station sale. The tax benefit was largely noncash and materially lifts reported earnings; it should not be treated as recurring operating profit.
Revenue mix highlights: local advertising was $190.2 million, national advertising $76.1 million, political advertising $46.3 million, retransmission compensation $60.9 million, and eMedia revenue $18.4 million. The company reported gross political revenue of $6.3 million in 2011. Capital expenditures, net of asset-sale proceeds, were $17.3 million in 2012; cash interest paid was $66.4 million.
At December 31, 2012, Nexstar and Mission had $100.0 million of available revolving commitments, subject to covenant compliance. Debt consisted principally of term loans, $325 million of 8.875% second-lien notes due 2017, and $250 million of 6.875% senior unsecured notes due 2020. The term loans mature in 2019. Senior secured term-loan rates were 4.5% at year-end; management estimated a 100-basis-point LIBOR increase would add about $0.9 million to annual interest expense. The filing states combined debt represented 99.7% of combined capitalization.
Material changes versus prior year
- Net revenue increased 23.5%, with acquisitions, political advertising, and higher retransmission compensation as major contributors. Management said 2011 and 2012 acquired stations together contributed about $38.6 million of 2012 revenue.
- Operating income more than doubled, supported by greater revenue and operating leverage, although operating expenses also rose with acquired stations and higher programming costs.
- Political advertising rose to $46.3 million in the 2012 election year. Retransmission compensation increased 63.0% to $60.9 million, mainly from higher contractual rates and acquired stations.
- Operating cash flow nearly doubled. Investing cash outflow increased to $238.6 million, primarily reflecting acquisitions; financing cash inflow was $220.2 million.
- Debt increased by $217.3 million year over year, alongside significant acquisitions and refinancing. The company issued $250 million of 6.875% notes and replaced its prior senior credit facilities with new facilities.
- In December 2012, Nexstar acquired ten stations in seven markets and Inergize Digital Media from Newport for approximately $225 million. It sold KBTV for $13.9 million and recognized the after-tax gain noted above.
Outlook, risks, and unusual items
- Liquidity and outlook: Management said cash, expected operating cash flow, and available credit were expected to fund working capital, capital expenditures, interest, and scheduled principal payments for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Acquisitions after year-end: Mission completed the Little Rock KLRT/KASN acquisition for approximately $60 million in January 2013. Nexstar completed acquisitions of KGPE, KGET, and KKEY-LP for approximately $35 million in February and, with Mission, acquired WFFF and WVNY for approximately $17 million in March. Nexstar also agreed to acquire KSEE for $26.5 million, subject to FCC approval, with closing then expected in the second quarter of 2013.
- Dividend: The board announced an intended annual dividend of $0.48 per share in quarterly installments of $0.12. The first payment totaled $3.5 million in March 2013. Future payments remain discretionary and subject to debt restrictions and financial conditions.
- Leverage and covenants: High debt service constrains cash available for investment and acquisitions. Credit agreements and note indentures restrict additional debt, dividends, acquisitions, asset sales, and other actions; the company reported covenant compliance at year-end and expected to remain compliant for at least 12 months.
- Business and regulatory risks: Results depend heavily on advertising, local economic conditions, audience ratings, and political cycles; many operating costs are fixed. Risks also include competition from online and other media, network-affiliation renewals and costs, retransmission-consent negotiations, FCC license renewals, possible changes to local-service-agreement rules, and potential spectrum repacking.
- Tax and asset risks: Federal and state NOLs were approximately $349.5 million and $76.6 million, respectively, but use may be limited by insufficient taxable income or ownership changes. Goodwill and intangible assets were $491.1 million, or 51.9% of combined assets; annual impairment tests identified no impairment in 2012.
- Other items: The company revised its broadcast-rights accounting presentation retrospectively; it said the revision was not material and did not affect reported earnings or cash flows. Management and the auditor reported effective internal control over financial reporting; certain 2012 acquisitions were excluded from the control assessment.
Most important facts for investors to verify
- How much of revenue and operating-income growth persists after separating acquisitions, election-year political advertising, and higher retransmission rates.
- Whether the $151.4 million valuation-allowance release is supportable by future taxable income, and how NOL limitations could affect future cash taxes.
- Debt repayment capacity, covenant headroom, floating-rate exposure, and the refinancing or repayment plan for the 2017 second-lien maturity.
- The full economic and credit exposure from Mission, including Nexstar’s guarantee of Mission debt, consolidation despite no equity ownership, and dependence on local-service agreements.
- Acquisition integration, purchase-price adjustments, FCC approvals, and the effect of subsequent acquisitions and dividend payments on liquidity and leverage.
- Potential changes to FCC rules affecting retransmission consent, joint sales and shared-services arrangements, station licenses, and broadcast spectrum.