Nexstar Media Group, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results. Unless noted otherwise, FY 2016 financial statements are for Nexstar before its January 17, 2017 merger with Media General; the merger and related financing are subsequent events.
Business context
Nexstar operates television stations and digital media businesses, earning revenue mainly from local and national advertising, political advertising, retransmission consent payments from multichannel distributors, and digital services. At year-end 2016, it owned, operated, programmed, or provided services to 104 full-power stations in 62 markets, reaching about 20.8 million viewers. After the Media General merger and station divestitures, the combined company served 171 stations in 100 markets, reaching about 44.7 million viewers, or nearly 39% of U.S. television households.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net revenue | $1,103.2 million | $896.4 million |
| Operating income | $287.3 million | $206.1 million |
| Operating margin | 26.0% | 23.0% |
| Net income attributable to Nexstar | $91.5 million | $77.7 million |
| Diluted EPS | $2.89 | $2.42 |
| Cash from operating activities | $247.8 million | $197.3 million |
| Cash and cash equivalents at year-end | $87.7 million | $43.4 million |
| Debt at year-end | $2,342.4 million | $1,476.2 million |
| Working capital at year-end | $173.6 million | $114.0 million |
FY 2016 revenue grew 23.1%. Political advertising rose to $108.5 million from $12.7 million, reflecting the presidential election year. Retransmission compensation increased 32.2% to $394.0 million, and digital media revenue increased 13.2% to $101.8 million. Local advertising grew 5.1% to $388.2 million, while national advertising declined 6.2% to $144.0 million. Management attributed growth to election-year advertising, acquisitions, and higher retransmission rates.
Operating expenses were $815.9 million, including a $15.3 million goodwill impairment charge. Net interest expense increased 44.2% to $116.1 million, primarily due to acquisition-related borrowing. Income tax expense was $77.6 million; the reported effective tax rate was 45.5%. Capital expenditures were $31.9 million. The company paid $99.9 million of cash interest and $29.4 million of dividends during 2016.
Fourth-quarter 2016 net revenue was $309.9 million versus $252.3 million in Q4 2015; operating income was $92.5 million versus $67.3 million. Net income attributable to Nexstar was $20.5 million versus $27.2 million, and diluted EPS was $0.64 versus $0.86.
At December 31, 2016, debt was 93.3% of combined capitalization, and $103.0 million of revolving commitments was available under the then-existing facilities, subject to covenant compliance. Cash flow and liquidity figures at that date predate the merger financing. Separately, $901.1 million of long-term restricted cash and $26.7 million of current restricted cash related to the escrowed 5.625% notes and prefunded interest; these were not ordinary unrestricted cash balances.
Material changes and merger financing
- On January 17, 2017, Nexstar completed the Media General merger, paying approximately $1.4 billion in cash, issuing about 16.2 million shares (fair value about $1.0 billion), and issuing replacement options. It also issued contingent value rights tied to Media General spectrum-auction proceeds.
- At closing, reported principal debt totaled approximately $5.223 billion, including $2.75 billion of Term Loan B, $370 million of Term Loan A, $900 million of 5.625% notes due 2024, and inherited notes. Funding included new borrowings and approximately $547.8 million of station-divestiture proceeds.
- After year-end, Nexstar prepaid $75 million of Term Loan B and called all $525 million of its 6.875% notes for redemption at 103.438% of principal plus accrued interest. The filing states the redemption was funded with new borrowings.
- The merger’s initial purchase-price allocation was incomplete as of the filing date. In February 2017, the board increased the quarterly dividend to $0.30 per share from $0.24.
Outlook, commentary, and risks
Management said available cash, expected operating cash flow, and borrowing availability were expected to fund working capital, capital spending, interest, and scheduled principal payments for at least the next 12 months. The filing provides no specific earnings or revenue guidance. Management plans to assess operating cash flow among capital expenditures, acquisitions, and debt reduction.
- Management expects network affiliation fees to continue rising over the next several years. Legacy-station programming costs increased $31.5 million in 2016, primarily due to new affiliation agreements.
- The company anticipated approximately $479 million of gross proceeds from Media General’s spectrum disposition later in 2017. Net proceeds, after expenses, repacking costs, and taxes, were to be distributed to CVR holders; the filing estimated CVR value at $1.70–$2.10 each.
- Some stations accepted spectrum-auction bids and were expected to cease broadcasting or share channels after payment; other stations faced repacking and technical-transition costs. The timing and business impact remained uncertain.
- Key risks include substantial post-merger leverage, variable-rate exposure and restrictive debt covenants; advertising cyclicality and competition from digital and streaming media; retransmission-consent negotiations and regulation; FCC ownership limits; and integration and realization of acquisition synergies.
- A digital business impairment of $15.1 million was recorded in Q4 due to operating losses, industry margin compression, and lower near-term earnings expectations. The remaining goodwill in that reporting unit was $6.3 million, and further impairment remained possible.
- Management reported ordinary-course litigation was not expected to materially affect financial condition or results. Disclosure controls and internal control over financial reporting were reported effective; acquired Reiten, KCWI, and WVMH operations were excluded from management’s control assessment.
Investor verification priorities
- Reconcile post-merger debt, subsequent repayment and redemption activity, borrowing costs, covenant headroom, and unrestricted liquidity.
- Verify realized net spectrum-auction proceeds, related repacking and transaction costs, and the resulting CVR distribution.
- Assess the merger purchase-price allocation, integration costs, and whether anticipated operating efficiencies and synergies are being achieved.
- Track retransmission compensation renewals, local and national advertising trends, and the sustainability of political-advertising-adjusted results.
- Monitor digital business performance and goodwill impairment sensitivity, as well as FCC repacking costs and station transition schedules.